The amendment to the India-Mauritius treaty signals the keenness to plug the well-known loophole. Discuss.

India and Mauritius have ratified a protocol in Port Louis, amending their Double Taxation Avoidance Agreement (DTAA). This updated agreement incorporates the Principal Purpose Test (PPT), aligning with international initiatives to combat treaty abuse, notably within the BEPS (Base Erosion and Profit Shifting) framework. The inclusion of the PPT signifies that tax advantages granted by the treaty will be void if it is determined that obtaining such benefits was the primary objective of any transaction or arrangement.

Evolution of Tax Treaties and the BEPS Project

Tax treaties play a crucial role in facilitating cross-border investment by determining how income earned in one country is taxed for residents of another. The Base Erosion and Profit Shifting (BEPS) project, initiated to curb tax avoidance through the exploitation of low-tax jurisdictions, prompted significant reforms in international tax laws. Led by the OECD, the project identified 15 action points aimed at redesigning tax laws to prevent profit shifting.

Multilateral Instrument (MLI) and Treaty Improvements

One notable outcome of the BEPS project was the introduction of the Multilateral Instrument (MLI), providing governments with the flexibility to modify tax treaties and clauses efficiently. Among the significant improvements introduced was the inclusion of provisions to prevent treaty abuse as a minimum standard and revisions to treaty preambles. These revisions aimed to prevent situations of non-taxation or reduced taxation resulting from tax evasion strategies, including treaty-shopping arrangements benefiting foreign residents.

Prevention of Treaty Misuse

The amended provisions ensure that treaty benefits, such as lower withholding rates, are not granted when obtaining such benefits is determined to be a primary objective of the transaction or arrangement. This provision enables tax administrations to scrutinize the intentions behind financial flows, particularly concerning investments routed through Mauritius. Mauritius has often been used as a conduit for investments by taxpayers from various jurisdictions, posing challenges for tax authorities in addressing treaty abuse.

Other Points to Consider 

What is STTR?

What is GAAR?

Places in news in Mauritius

What are base erosion and profit shifting?