By: Suchak Patel
When an Indian hear the word “Mauritius” first thing come in mind is beautiful seashore, natural beauty , rivers and Honeymoon package but Mauritius also famous for Tax haven.
We heard lots about Mauritius and FDI flows in India , 40% of Total FDI come from single building of Mauritius – Which is a 12-storey building in the heart of Port Louis, the capital of Mauritius, holds significance in India’s FDI inflows story. Much of the $55- billion investment into India from the island — which accounts for 40 per cent of India’s FDI — originates from just this one building.
It’s not Only India’s problem, but problem for all BRICS countries. BRICS country’s leaking tax revenues is each country’s biggest source of outside investment is a tax haven. China counts the tiny Caribbean bolthole of the British Virgin Islands as its biggest source of foreign investment (not including the Chinese territory of Hong Kong). India has Mauritius, Russia has Cyprus, and Brazil has the Netherlands. (Most foreign investment in BRICs isn’t foreign at all—it’s tycoons using tax havens)
It’s complex to understand the tax process and rules and specially when transaction between two countries. It is a magic of two things :-
1. Double Taxation Avoidance Agreements 2. Tax heaven
*How do people use tax havens to avoid paying taxes?
The most obvious is to move to the tax haven country and become a resident for the purpose of paying taxes.
* So what is the problem?
The problem has arisen because of ’round tripping’ or ‘treaty shopping.’
* What does it mean?
Round tripping refers to routing of investments by a resident of one country through another country back to his own country .
This is how it works: You get money out of India and transmit it to a tax haven with whom India has a bilateral tax avoidance treaty. In the tax haven, this money is treated as capital of a registered corporate entity. You now invest this money back in an Indian company as foreign direct investment (FDI) by buying stakes or invest it in Indian equity markets.
The entire purpose of this exercise is to window-dress as foreign capital your original money which you had taken out from India. In the entire process, you end up paying zero or negligible taxes. In India, you can claim tax exemption citing the double-taxation avoidance agreement arguing that you have paid taxes in the source country. In the source country, taxes are negligible since it is a tax haven.
* How does it work?
An Indian resident investing directly in shares of an Indian company would have to pay capital gains taxes. However, if the he routes his investments through an entity incorporated in Mauritius, the taxes can be avoided under a double taxation avoidance treaty (DTAA) between the two countries.
* What is DTAA?
These are bilateral treaties signed between governments to prevent companies from paying taxes both in their country of origin as well as in the country where they are doing business.
* So what is the problem with Mauritius?
The problem is that Mauritius and other tax havens have almost negligible taxes. This is encouraging resident Indian entities to route their investments back to India through Mauritius and avoid paying taxes
* Is this a rising trend?
Yes it is. At $64billion, it is the largest foreign direct investment source for India, accounting for 38% of total FDI.
Meanwhile, investments from Cyprus, another tax haven, are also on the rise with FDI from the country increasing 10 times in the last three years. At nearly $7 billion Cyprus is now the seventh largest FDI contributor to India ahead of Germany and France.
With Example :-
Investors route money into India through Mauritius and use our double tax treaty to prevent India from charging capital gains tax on these investments. These investors save themselves as much as 50% in capital gains tax, and end up paying Mauritius 3% tax on their profits.
The result of this arrangement is that from 2000 to 2013, $72 billion has flowed into India from Mauritius. This represents 38% of cumulative equity inflows into India over this period, according to the Indian Ministry of Commerce and Industry.
What did Mauritius get out of this?
First a quick lesson in tax treaties:
The Mauritius-India Double Tax Avoidance Treaty says, amongst other things, that any tax resident of Mauritius will be taxed on their capital gains in Mauritius, even if these gains are made in the ‘other country’ – India. The best way to become tax resident in Mauritius is to establish a Mauritian Company with a Category 1 Global Business License. This company, while being taxed at our normal rate of 15%, gets an 80% discount on its tax for deemed foreign taxes paid. So in effect, this company pays 3% tax (which is 80% of 15).
Ok, back to what Mauritius got out of this…
The 3% taxes that were paid by Category 1 companies amounted to 30% of all company tax paid in Mauritius in 2011. In 2012 it was 35%. In terms of all taxes paid in Mauritius, this amounted to 17% in 2011 and 20% in 2012.
So to summarise, India gets 38% of its foreign investment income from Mauritius, and Mauritius gets 20% of its tax income from India.
India has comprehensive DTAA with 83 countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA, while Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a DTAA. Thus, India gives relief to both kind of taxpayers.
According to the tax treaty between India and Mauritius, capital gains can only be taxed in Mauritius, the same treaty exist with 16 other countries. But with only 3% of capital gains tax, the quality of its service and regulatory framework, its pool of professionals, geographical proximity, cultural affinities and long historical ties with India, Mauritius is the most attractive conduit for investments into India.
The DTAC has helped Mauritius in the development of its Financial Services sector and India has on the other hand benefitted in terms of foreign direct investments, which for the last ten years stand at a cumulative figure of around USD 55Billion, and also in terms of job creation.