Mauritius is working on new laws to further reinforce the credibility of its tax residency certificates (TRC). The attempt is to give specific legislative backing to some of the best practices already being adopted by the island-nation, which is an international financial centre.
A TRC is an important document for Indian tax authorities, as it forms the basis for granting benefits under the India-Mauritius Double Tax Avoidance Agreement (DTAA). However, in recent years, many Indian assessment officers were not comfortable with the TRC issued by Mauritian authorities and were looking to pierce the veil on corporate structures above the level of Mauritius.
Indian authorities contend that most investments coming through Mauritius are nothing but treaty shopping to avoid tax. Mauritius accounts for over 40 per cent of foreign direct investment coming into India.
Some recent pronouncements have drawn attention to the validity of TRCs. The Bombay High Court order on the Aditya Birla Nuvo case led many tax experts to believe that the Indian authorities would be encouraged to go behind the TRC issued by Mauritius to reveal the actual beneficial shareholders of an Indian company.
Simply put, it was contended that a TRC may not constitute as sufficient evidence for accepting the status of residence and beneficial ownership while applying treaty benefits under the DTAA.
If the investments are being made by companies not incorporated in Mauritius, the Indo-Mauritius treaty benefits may not be protected even if such investments are routed through special purpose vehicles established in the island nation, said experts.
However, the Supreme Court's landmark judgment in the Vodafone case had settled the issue and reinforced the validity of TRC issued by Mauritius. Mauritius is now keen to finetune laws to further support its TRCs.
“Mauritius is planning to come with laws to further reinforce TRCs,” said Mr Couldip Basanta Lala, Director, International Financial Services Ltd (IFS), an advisory and management services company based in Mauritius. He was in the capital for an international tax conference organised by the International Fiscal Association — India branch.
Mr Lala's remarks come on the heels of the visit of the Mauritius Prime Minister, Dr Navinchandra Ramgoolam, to New Delhi this week. The Prime Ministers of the two countries reviewed the status of the implementation of the DTAA.
The Prime Minister, Dr Manmohan Singh, said that both countries have an interest in ensuring that there was no misuse of the DTAA. He also noted that the joint working group had resumed its work and held a meeting recently in Port Louis in December 2011.
Indications are that the next round of the joint working group meeting will take place later this month in India. India is keen that capital gains exemption available to residents of Mauritius under the treaty be withdrawn.