TREATY SHOPPING CURBS 

The Foreign Direct Investment that comes predominantly through Mauritius is likely to get hit by one of the Budget measures.

The Government has attempted to curb/regulate ‘treaty shopping'. Treaty shopping refers to the scouting efforts of intending investors from third countries (not a party to the treaty of two contracting countries) to identify a jurisdiction which allows such tax benefits under the treaty.

Limitation of benefits

In other words, in a treaty shopping, such parties are interlopers into the tax benefit available to the contracting countries.  This benefit basically arises because of the absence of ‘limitation of benefits' clause in the treaty - seeking to restrict the benefit to the contracting countries.

The Mauritian treaty

The Indo-Mauritius treaty does not have this ‘limitation of benefits' clause.  This has led to it becoming a happy hunting ground for third party countries.  A bulk of our foreign direct investment (FDI) — almost 45 per cent of FDI comes through treaty shopping via Mauritius route.

 Companies benefited by a hitherto liberal approach which allowed a mere tax residence certificate to be considered as proof of beneficial interest in that country.  That is set to change and this will now be subject to more onerous conditions than mere proof of residence.

The amendment in the law will undo the Supreme Court's clarification in the Azadi Bachao Andolan case. 

The Singapore treaty

The Government has decided to check the unintended treaty benefits arising to third party residents.  Accordingly, the present proposal in the finance bill is to amend Sec 90 and Sec 90 A of the Income Tax Act, to make submission of tax residency certificate containing prescribed particulars as a necessary but not sufficient condition for availing treaty benefits.  It is quite likely that there may be a greater insistence of economic content to a person's residence in a contracting country than a mere ‘presence'.

 Experts think this may be on the lines of the Indo-Singapore treaty. They clarify that the intention is not to deny the benefit of treaty shopping but to regulate it.

(This article was published on March 16, 2012)
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