Taxation / Taxation / Rationalization of DTAA..
- Amendments for Prevention of Misuse:
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- In response to concerns about potential misuse, amendments were made to Double Taxation Avoidance Agreements (DTAAs). A notable example is the amendment to the India-Mauritius DTAA in 2016.
- India-Mauritius Protocol (2016):
- India and Mauritius signed a Protocol in 2016 to amend their 1982 DTAA. This amendment aimed to prevent misuse and address concerns related to round-tripping and potential tax avoidance.
- Taxation of Capital Gains:
- The protocol granted India the right to tax capital gains arising in India for investments coming from Mauritius starting from 2017.
- Grandfathering Provision:
- Investments made before April 1, 2017, were grandfathered, meaning they continued to enjoy the benefits of the earlier provisions and were not subject to capital gains taxation in India.
- Transition Period (2017-2019):
- For capital gains arising during the transition period from April 1, 2017, to March 31, 2019, the tax rate was limited to 50% of the domestic tax rate of India.
- Limitation of Benefits (LOB) Article:
- The benefit of the 50% reduction in the tax rate during the transition period was made subject to the Limitation of Benefits Article. This ensured that only genuine investors could avail themselves of these benefits.
- Preventing Treaty Shopping:
- DTAAs include a Limitation of Benefits (LOB) article to prevent treaty shopping, where entities exploit different DTAAs to maximize gains. This article denies treaty benefits to those not genuine residents based on specified tests.
- India-Mauritius LOB Rules:
- The LOB rules in the India-Mauritius DTAA, for example, include criteria such as a minimum expenditure on operations in Mauritius to prevent shell companies from taking advantage of the treaty.
- Substance Requirement:
- A resident of Mauritius is not entitled to the benefits if it is a shell company, defined by having total expenditure on operations in Mauritius less than a specified amount in the preceding 12 months.
- Impact on Substance and Transparency:
- The LOB clause, in this context, aims to bring substance to companies claiming tax residency in Mauritius, preventing misuse and ensuring transparency in international tax practices.
Rationalizing DTAAs is a continuous process to align them with evolving economic and tax scenarios, preventing abuse, and promoting fair and transparent cross-border transactions.
