Important protocol signed between India & Mauritius to amend their Double Tax Avoidance Agreement (‘DTAA’ or ‘tax treaty’).

Brief background

• Mauritius decided to revise its DTAA with India to better align it with the OECD’s Base Erosion and Profit Shifting (BEPS) Action 6 proposal.
• The Action 6 Report outlines one of four BEPS minimum standards, where members of the BEPS Inclusive Framework agree to incorporate provisions in their tax treaties to address treaty shopping and prevent potential abuse, ensuring minimum level of protection against treaty abuse.
• The report also states that countries, at a minimum, should implement:
  • a principal purpose test (‘PPT’) only (or)
  • a PPT and either a simplified or detailed limitation on benefits(‘LOB’) provision (or)
  • a detailed LOB.
• Jurisdictions can meet the minimum standard by either renegotiating their DTAA or adopting the MLI.
• Mauritius signed the MLI in 2017 to prevent base erosion and profit shifting. MLI only applies to tax treaties categorised as ‘Covered Tax Agreements’ (CTA). India incorporated the India-Mauritius tax treaty under the MLI, Mauritius opted not to list its treaty with India as CTA in the Ratification Instrument of the MLI deposited with the OECD in 2019. Thus, the MLI would not apply to the India-Mauritius tax treaty.
• Instead, Mauritius has chosen to meet this requirement by renegotiating and amending its DTAA with India.

Amendments in DTAA

• As per the new protocol dated March 07, 2024, the tax treaty with India will be amended to alter the preamble, ensuring compliance with one of the requirements of the BEPS Minimum Standard.
• This amendment involves an express statement that the common intention of the parties to the treaty is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements.
• The PPT is designed to withhold treaty benefits if one of the primary intentions behind an arrangement or transaction is to gain advantages under the treaty in a manner contrary to its intended objectives.
• It is important to note that legitimate commercial transactions or operations undertaken by taxpayers and investors should not be adversely affected by the PPT, as its purpose is to address abusive arrangements.
• The amended protocol provides that Tax Treaty benefits would not be available where it is reasonable to conclude that the principal purpose of any arrangement was to claim tax benefits.
• The protocol will come into force once both countries notify its implementation. It also provides that this would be applicable from date of entry into force without regard to the date on which the taxes are levied or the taxable years to which the taxes relate.

Our preliminary thoughts

• It is pertinent to note the interplay between the Protocol and Circular 789 which states that Tax Residency Certificate (TRC) would constitute sufficient evidence for claiming treaty benefits under India Mauritius tax treaty which was also upheld by Hon’ble Apex Court in Union of India v. Azadi Bachao Andolan;
• Considering the wording/ literature of the protocol with regards to date of entry into force, it appears that PPT can be applied to all existing investments and to investments made before April 1, 2017 which have been grandfathered under Article 13 of the DTAA.
• As a result, a coherent interpretation of 789 with the Protocol, may require a closer look at the intent of structures (beyond the TRC), so as to determine whether granting the benefit is in line with the objects and purposes of the treaty.
• Further, the Indian Income Tax department also clarified in social media yesterday that the Protocol is yet to be ratified/ notified & and when the Protocol comes into force, queries, if any, will be addressed, wherever necessary.
• Considering the significant exposure of foreign overseas investments into the Indian market via Mauritius jurisdiction, it is important that there is clarity from the Indian revenue authorities in terms of applicability of this protocol especially in the context of grandfathered investments.

There have been timely developments in India in the context of PPT test from a cross border tax treaty perspective. This only emphasizes the importance placed by the Indian revenue authorities to assess the commercial rationale for any holding structure in place/ transactions where a tax treaty benefit is availed.