India’s Evolving Tax Treaty Landscape

The recent amendments to the India-Mauritius Double TaxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... Avoidance Agreement (DTAA) have significant implications for foreign investors. Introducing the Principal Purpose Test (PPT) and other anti-abuse provisionsAnti-abuse provisions are legislative measures implemented by tax authorities to prevent taxpayers from exploiting legal loopholes or engaging in artificial arrangements solely to reduce their tax liabilities. These provisions are essential tools for revenue authorities to maintain fairness in the tax system, ensuring that the intent of tax laws is respected and that tax bases are protected against erosion due... aim to curb tax evasionTax Evasion refers to illegal activities or practices undertaken by individuals or businesses to avoid paying taxes. It involves intentionally misrepresenting or concealing income, inflating deductions, or underreporting earnings to reduce tax liability unlawfully. Unlike tax avoidance, which uses legal methods to minimize tax obligations, tax evasion is a criminal offence that carries significant penalties, including fines, imprisonment, and asset... and treaty shopping. This article, from the perspective of Dr. Daniel N Erasmus of Tax Risk ManagementTax risk management is a structured process used by organizations, particularly multinational enterprises (MNEs), to identify, assess, and mitigate potential risks that arise in relation to tax compliance, reporting, and planning. It plays a crucial role in ensuring that a company’s tax obligations are managed in a way that minimizes risk exposure while maximizing efficiency and strategic value., delves into the historical context, current developments, and future implications of these changes. It also explores how Dr. Erasmus and his team can assist businesses in navigating these complex tax landscapes.

Historical Context

The Landmark Case: Union of India v. Azadi Bachao Andolan

India’s concerns about the basis of its tax treaties began with the landmark Supreme Court case of Union of India and Anr v. Azadi Bachao Andolan and Anr in 2003. This case addressed whether investments from Mauritius were exempt from taxation in India. The court held that a tax residency certificate (TRC) was sufficient proof to claim the exemptions in the 1982 treaty.

The Vodafone Case

In 2008, a USD 2 billion withholding tax levy imposed by the Indian government on Vodafone took foreign investors by surprise. This case highlighted the uncertainties and complexities in India’s tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... obligations.

Recent Developments: Assessing Officer v. M/S Nestle SA

In October 2023, the Supreme Court delivered a highly anticipated verdict on India’s tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... obligations in the case of Assessing Officer v. M/S Nestle SA. This case, along with media releases about tax notices received by foreign portfolio investors (FPI), has compounded investor concerns.

The Role of Mauritius in Foreign Investment

Mauritius as a Strategic Investment Partner

Mauritius has been a significant player in India’s foreign direct investment landscape. With a population of 1.2 million and an area of 2,000 square kilometers, Mauritius has been at the forefront of India’s strategic investment partnerships.

Offshore Tax Regimes

Smaller island nations like Mauritius have opted to become offshore tax regimes due to constraints on their natural resources and labor availability. These constraints lead to high unit costs of production, prompting these nations to implement relaxed regimes for the taxation of offshore income.

The India-Mauritius Tax Treaty

The 2017 Protocol

The Mauritius treaty with India is a favorable tax agreement under which Indian-sourced capital gainsCapital gains refer to the profit earned when an asset, such as real estate, stocks, bonds, or even a collectible, is sold or exchanged for a price that exceeds its original purchase cost. These gains are a critical component of personal and corporate finance, as they influence investment strategies and tax obligations. Capital gains are realised when an asset is... of investors who were tax residents in Mauritius were exempt from paying tax in India. As India’s foreign investment policy matured, the treaty was amended multiple times, most notably through its 2017 protocol.

General Anti-Avoidance Rules (GAAR)

In 2017, the Indian government introduced the General Anti-Avoidance Rules (GAAR) into domestic tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public.... These rules codified the substance over form approach, empowering tax authorities to deny tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... benefits where the main purpose of an arrangement was to obtain a tax benefit.

The Multilateral Instrument (MLI)

In 2019, India ratified the Multilateral Instrument (MLI), a multilateral initiative spearheaded by the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... to address concerns of base erosion and profit shiftingBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode.... The MLI includes the application of the Principal Purpose Test (PPT), which aims to tackle instances of treaty shopping.

The 2024 Protocol: Key Amendments

Introduction of the Principal Purpose Test (PPT)

The 2024 protocol introduced a stringent anti-abuse test into the existing regime, aligning it with the PPT language in the MLI. For the protocol to be effective, any treaty benefit, such as a concession dealing with the withholding tax rate on dividends, must pass the PPT.

Date of Entry into Force

The protocol will enter into force from the date the two governments bring it into law. This creates some ambiguity regarding whether the protocol can apply retrospectively to income earned in past years that are still open to audits or should be applied prospectively.

Implications for Foreign Investors

Increased Scrutiny and Compliance Requirements

The introduction of the PPT and other anti-abuse provisionsAnti-abuse provisions are legislative measures implemented by tax authorities to prevent taxpayers from exploiting legal loopholes or engaging in artificial arrangements solely to reduce their tax liabilities. These provisions are essential tools for revenue authorities to maintain fairness in the tax system, ensuring that the intent of tax laws is respected and that tax bases are protected against erosion due... means that foreign investors will face increased scrutiny and compliance requirementsReporting obligations refer to the mandatory requirements imposed by tax authorities on entities or individuals to disclose specific financial and operational information. These obligations are designed to ensure transparency in taxation, help detect and prevent tax evasion, and support compliance with national and international tax standards. Such requirements can vary widely in scope, depending on jurisdiction and the nature of.... They must demonstrate that their operations have commercial substance and are not merely structured to obtain tax benefits.

Impact on Existing Investments

A retrospective application of such rigorous anti-abuse provisionsAnti-abuse provisions are legislative measures implemented by tax authorities to prevent taxpayers from exploiting legal loopholes or engaging in artificial arrangements solely to reduce their tax liabilities. These provisions are essential tools for revenue authorities to maintain fairness in the tax system, ensuring that the intent of tax laws is respected and that tax bases are protected against erosion due... could disturb the existing position on treaty eligibility and cause further uncertainty. This is particularly concerning for investments made prior to the amendments, which were previously grandfathered.

The Role of Tax Residency Certificates (TRCs)

With TRCs no longer being sufficient proof of treaty entitlement, India’s relationship with tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... law has come full circle. The extent to which this more robust tax approach casts doubt on repeated government promises relating to grandfathered investments remains to be seen.

Navigating the New Tax Landscape

The Need for Proportionate Tax Policy

In a fast-moving era where businesses are rapidly adopting ESG norms, and adherence to tax transparency and disclosure norms is emerging as a new normal, multinational companies should be allowed to demonstrate that their operations have commercial substance in a straightforward and flexible manner.

Balancing Anti-Abuse Measures with Economic Interests

While tax administrations are expected to increase anti-abuse actions in line with the global multilateral framework, economic interests must flag their concerns. India’s approach must include a more proportionate tax policy and an investor-friendly environment.

How Dr Daniel N Erasmus and His Team Can Assist

Expertise in International Tax Law

Dr. Daniel N Erasmus and his team at Tax Risk ManagementTax risk management is a structured process used by organizations, particularly multinational enterprises (MNEs), to identify, assess, and mitigate potential risks that arise in relation to tax compliance, reporting, and planning. It plays a crucial role in ensuring that a company’s tax obligations are managed in a way that minimizes risk exposure while maximizing efficiency and strategic value. have extensive expertise in international tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public.... They can provide valuable insights and guidance on navigating the complexities of the India-Mauritius tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... amendments.

Assistance with Compliance and Documentation

The team can assist businesses in ensuring compliance with the new anti-abuse provisionsAnti-abuse provisions are legislative measures implemented by tax authorities to prevent taxpayers from exploiting legal loopholes or engaging in artificial arrangements solely to reduce their tax liabilities. These provisions are essential tools for revenue authorities to maintain fairness in the tax system, ensuring that the intent of tax laws is respected and that tax bases are protected against erosion due... and in preparing the necessary documentation to demonstrate commercial substance and genuine business purposes.

Strategic Tax Planning

Dr. Erasmus and his team can help businesses develop strategic tax planningTax planning is the process of organising and structuring one’s financial affairs in a manner that legally minimises tax liabilities while ensuring compliance with relevant tax laws. The primary objective of tax planning is to reduce the amount of taxes paid, optimise the use of available tax benefits, and preserve wealth. It can be applied at various levels, including personal... solutions that align with the new tax landscape while optimizing their tax positions.

Representation in Disputes

In case of disputes with tax authorities, the team can provide robust representation and advocacy to protect the interests of businesses and ensure fair treatment.

In Closing

The amendments to the India-Mauritius tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... represent a significant shift in India’s approach to international tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public.... While these changes aim to curb tax evasionTax Evasion refers to illegal activities or practices undertaken by individuals or businesses to avoid paying taxes. It involves intentionally misrepresenting or concealing income, inflating deductions, or underreporting earnings to reduce tax liability unlawfully. Unlike tax avoidance, which uses legal methods to minimize tax obligations, tax evasion is a criminal offence that carries significant penalties, including fines, imprisonment, and asset... and treaty shopping, they also introduce new challenges and uncertainties for foreign investors. Dr. Daniel N Erasmus and his team at Tax Risk ManagementTax risk management is a structured process used by organizations, particularly multinational enterprises (MNEs), to identify, assess, and mitigate potential risks that arise in relation to tax compliance, reporting, and planning. It plays a crucial role in ensuring that a company’s tax obligations are managed in a way that minimizes risk exposure while maximizing efficiency and strategic value. are well-equipped to assist businesses in navigating these complexities, ensuring compliance, and optimizing their tax positions.