India and Mauritius Amended Double Taxation Avoidance Agreement (DTAA)

Apr16,2024 #Mauritius #Tax treaty

Published on: April 16, 15:21 IST

India has taken a major step to address tax evasion and avoidance by signing a protocol amending the Double Taxation Avoidance Agreement (DTAA) with Mauritius. The amended pact introduces the Principal Purpose Test (PPT), which aims to prevent treaty abuse for tax purposes.

Here are the key points from the amended protocol:

  1. Principal Purpose Test (PPT): The PPT sets a condition that tax benefits under the treaty will not apply if it is established that obtaining those benefits was the principal purpose of any transaction or arrangement.
  2. Entitlement to Benefits: Article 27B has been introduced in the treaty, defining the ‘entitlement to benefits.’ The PPT will deny treaty benefits (such as reduced withholding tax on interest, royalties, and dividends) if obtaining those benefits is one of the principal purposes for the party engaged in the transaction.
  3. Effective Date: The amendment was signed on March 7, 2024, in Port Louis, Mauritius, and was made public recently.
  4. Impact on Investments: Mauritius has been a preferred jurisdiction for investments in India due to the non-taxability of capital gains until 2016. The recent amendment does not clarify if past investments will be grandfathered, and the Ministry of Finance is yet to issue a clarification.
  5. Foreign Portfolio Investors (FPI): The DTAA was a major reason for foreign portfolio investors (FPIs) and foreign entities to route their investments in India through Mauritius. Mauritius remains India’s fourth-largest source of FPI investments.
  6. Preamble Amendment: The preamble of the treaty now emphasizes eliminating double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.
  7. BEPS MLI Impact: Investment structuring through Mauritius should consider the impact of the BEPS MLI (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting), especially when availing of tax treaty benefits.
  8. Potential Litigation: While the amendment aims to curb tax treaty abuse, it may lead to increased litigation. Investors from Mauritius will need to demonstrate that their primary objective was not solely to obtain treaty benefits.**News+Update%3A+India+and+Mauritius+Amend+Double+Taxation+Avoidance+Agreement+%28DTAA%29**%5Cn%5CnIndia+has+taken+a+significant+step+to+address+tax+evasion+and+avoidance+by+signing+a+protocol+amending+the+Double+Taxation+Avoidance+Agreement+%28DTAA%29+with+Mauritius.+The+amended+pact+introduces+the+**Principal+Purpose+Test+%28PPT%29**%2C+which+aims+to+prevent+treaty+abuse+for+tax+purposes.%5Cn%5CnHere+are+the+key+points+from+the+amended+protocol%3A%5Cn%5Cn1.+**Principal+Purpose+Test+%28PPT%29**%3A+The+PPT+sets+a+condition+that+tax+benefits+under+the+treaty+will+not+apply+if+it+is+established+that+obtaining+those+benefits+was+the+principal+purpose+of+any+transaction+or+arrangement.%5Cn%5Cn2.+**Entitlement+to+Benefits**%3A+Article+27B+has+been+introduced+in+the+treaty%2C+defining+the+%27entitlement+to+benefits.%27+The+PPT+will+deny+treaty+benefits+%28such+as+reduced+withholding+tax+on+interest%2C+royalties%2C+and+dividends%29+if+obtaining+those+benefits+is+one+of+the+principal+purposes+for+the+party+engaged+in+the+transaction.%5Cn%5Cn3.+**Effective+Date**%22%7D%5D&IG=CCEF4105E5404714B6497A6882885C6C&IID=SERP.5028&cw=1232&ch=564&form=codexx&dissrchswrite=1&kseed=8000&SFX=3&q=India+Mauritius+DTAA+protocol+amendment&iframeid=ed578f40-2df2-3050-4a6c-acb1eee37ca5&cdxpc=SERP&cdxafr=1&brid=2d21712c-443a-89ac-4195-24571ae08923&codex_src=sq

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