Mauritius tightens norms to check proxy tag

• Long accused of being a route for avoiding taxes for foreign investments into India, Mauritius has put additional safeguards in place to thwart such wrong perceptions and to boost its image as a preferred global financial centre.
• Mauritius’ integrated financial sector regulator Financial Services Commission (FSC) has put in place ‘greater substance requirements’ for global business companies operating from its jurisdiction to ensure their substantial presence there, and not just a ‘proxy address’ to benefit from tax treaties with India and other countries.
• These additional requirements being imposed on Global Business Category (GBC) 1 companies will lead to the creation of more economic nexus between those companies and the economy of the island.
• Most global investors use GBC-1 route to make investments into India and other countries through Mauritius.
• In its attempt to stop round-tripping and money laundering activities, Mauritius has agreed to include a ‘limitation of benefits (LoB)’ clause in its revised tax treaty with India.

Significance of LoB clause:

• While specific details of this clause in India-Mauritius tax treaty are being ironed out, LoB clauses are typically aimed at preventing ‘treaty shopping’ or inappropriate use of tax pacts by third-country investors.
• The LoB clause limits treaty benefits to those who meet certain conditions, including those related to business, residency and investment commitments of the entity seeking benefit of a Double Taxation Avoidance Agreement (DTAA).

Besides, a Tax Information and Exchange Agreement (TIEA) between India and Mauritius has been finalised.

There has been cooperation from both sides on information exchange and with this  India’s share in the number of investments made by global companies through Mauritius has almost been halved in the past two years even as Africa’s share has surged significantly, amid uncertainties over the bilateral tax treaty.

The share in the number of investments made by global business companies into India has slumped to almost 16% in 2012. In 2010, India’s share was as high as 32%, before declining to 23% in 2011.

To know more about Tax Information Exchange Agreements (TIEAs):

• The purpose of this Agreement is to promote international co-operation in tax matters through exchange of information.  It was developed by the OECD Global Forum Working Group on Effective Exchange of Information
• The Agreement grew out of the work undertaken by the OECD to address harmful tax practices. The lack of effective exchange of information is one of the key criteria in determining harmful tax practices. The mandate of the Working Group was to develop a legal instrument that could be used to establish effective exchange of information. The Agreement represents the standard of effective exchange of information for the purposes of the OECD’s initiative on harmful tax practices.
• This Agreement, which was released in April 2002, is not a binding instrument but contains two models for bilateral agreements.  A number of bilateral agreements have been based on this Agreement.