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Home / Business News / Mauritius resists Govt move to check tax ducking

Mauritius resists Govt move to check tax ducking

India proposes source-based taxation of capital gains available for firms based in Mauritius, reports Gaurav Choudhary.

business Updated: May 04, 2007 21:21 IST
Gaurav Choudhury
Gaurav Choudhury

India and Mauritius are discussing various ways and means through which the misuse of a Double Taxation Avoidance Agreement (DTAA) between the two nations can be avoided, although the latter is not keen on a solution suggested by India on grounds that the measures aimed at tracking offshore companies based in the island could hurt genuine firms in Mauritius.

India has proposed source-based taxation of capital gains available for firms based in Mauritius as a possible solution to the problem arising from abuse of the bilateral treaty.

“The Mauritian government is not willing to consider this solution as in their view, this would adversely affect their offshore financial services sector, which contributes almost 11 per cent of their gross domestic product (GDP) and would hurt even the genuine companies of Mauritius”, said an informed source, who did not wish to be identified.

Finance Minister P Chidambaram told parliament on Thursday that his ministry was addressing the issue with help from the Ministry of External Affairs. “This is not only a legacy issue, it is a delicate issue and has political and diplomatic implications”, he said.

The problem has arisen because of "round tripping" or “treaty shopping” by Indian entities moving money out of the country and then getting it back into India through what is known as GBC 1 companies incorporated in Mauritius, in the process gaining from capital gains exemptions available for companies based in the island.

A GBC 1 company is an entity, which undertakes any of the 12 categories of business (which include aircraft financing and leasing, asset management, financial services and pension funds) and carries out business from within Mauritius by employing persons all of whom are resident outside Mauritius.

Round-tripping refers to routing of investments by a resident of one country through the other country back to his own country. For example, a resident of India investing directly in shares of an Indian company would be taxable on capital gains arising from transfer of shares. However, if the same resident routes his investments through Mauritius to buy the shares of an Indian company and claims that these investments were made through a resident Mauritius entity, then the taxes can be avoided under the DTAA.

A joint working group (JWG) comprising representatives of the Indian and the Mauritius government was constituted in October last year to address these concerns. “In all the four meetings of the JWG held so far, India has consistently emphasized its concerns on round tripping and treaty shopping," said a government source.

Besides, the Indian government has also been unable to extract effective information from Mauritius, particularly those pertaining to the banking sector as the Mauritius Revenue Authority is not empowered under domestic law to obtain and share banking information. The income tax law of Mauritius allows its revenue authorities to get details of bank accounts held by persons directly from banks only where a person has been convicted of an offence relating to dangerous drugs or weapons.

"The only channel available in the Mauritian domestic law for obtaining banking information is through a judge in chamber," a government official said.

“India has requested the Mauritius government to inform New Delhi regarding number of cases in which they have approached the Judge in Chamber as this channel is not available to India directly. The Mauritius Government has so far not reverted back," a source said.

There are three major nations Cyprus, the United Arab Emriates and Mauritius with whom the problem of “round tripping” had arisen for India While Cyprus and UAE have agreed to source-based taxation, Mauritius remains a key concern.

Government sources said that the Finance Ministry has circulated a note to all concerned ministries on the matter. “On receipt of the responses, we are intending to resume the negotiations which will be led by the Ministry of External Affairs”, said a source.

ht epaper

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