Mauritius Gears up for Indian GAAR

As per the latest statistics, about 40% of India’s annual FDI of about $23 billion comes from Mauritius; next on the list is Singapore, from where around 10% comes. An astronomical sum, $75 billion, has flown into India from Mauritius as FDI between April 2000 and July 2013. Similarly, for investments by foreign institutional investors (FIIs) in India, the share of Mauritius is again significantly high. The key reason for this is the well-known capital gains tax exemption accorded to foreign investors under the India-Mauritius Tax Treaty.

For many years now, the Indian revenue authorities have been closely monitoring the flurry of investments from Mauritius from a tax avoidance and treaty shopping perspective. The crux of Revenue’s argument is that the investments are routed by foreign investors through conduit vehicles formed in Mauritius merely to claim tax treaty benefits. With the Indian General Anti-Avoidance Rules (GAAR) slated to come into force in April 2015, the issue of demonstrating substance in Mauritius entities is bound to become more prominent.

Interestingly, the Financial Services Commission (FSC) in Mauritius has now proposed certain amendments in the Mauritius law to prescribe additional economic substance requirements by Category 1 Global Business Companies (GBC1 Companies). In case these requirements are not complied with, it is provided that a Tax Residency Certificate (TRC) will not be issued to such entities. This becomes relevant from an Indian standpoint since the Indian income-tax law now provides that a foreign company is mandatorily required to obtain a TRC from the government of its home country in order to avail the benefits of a tax treaty.

The additional requirements laid down by FSC for the substance criteria, i.e. being regarded as ‘managed and controlled’ in Mauritius, are:

• Hitherto, a minimum of two directors were required to be resident in Mauritius, and be of sufficient calibre to exercise independent judgement. The directors are now required to be ‘appropriately qualified’.
• If the GBC1 Company is authorised/licensed as a collective investment scheme, closed-end fund or external pension scheme, it would have to be administered from Mauritius.
• In addition to the above, the GBC1 Company is also required to satisfy at least one of the following specified requirements:
• Have office premises in Mauritius.
• Employ, on a full-time basis, at least one person who is resident of Mauritius.
• Hold assets of at least $100,000 in Mauritius.
• Have its shares listed on a securities exchange licensed by the FSC.
• Constitution of GBC1 Company should contain a clause whereby all disputes arising out of the constitution shall be resolved by way of arbitration in Mauritius.
• Incur a yearly expenditure in Mauritius, which can be reasonably expected from any similar company controlled and managed from Mauritius.

The onus to satisfy the FSC that its level of expenditure in Mauritius is reasonable would be on the GBC1 Company. Factors to be considered for deciding whether the level of expenditure is reasonable include the type of activity of the corporation, its average turnover, the country(ies) in which it conducts business, the value of its net assets and the industry average.

Interestingly, the amendments provide for a leeway in a situation where if a group has more than one entity registered as GBC1 Company in Mauritius, all group companies would be deemed to be compliant if any one group company is compliant.

The FSC has stated that these additional requirements are to be complied on and from January 1, 2015, which incidentally is just prior to the trigger date of the Indian GAAR. Though not formally stated, it appears that the amendments have been proposed to negate a possible GAAR enquiry from Indian authorities on the Mauritian entities.

At the moment, there does not seem to be any specific provision in the Indian GAAR that gives relief to companies that have passed substance test under the domestic laws of any foreign jurisdiction. In other words, while the additional parameters laid down by the FSC would help demonstrate control and management in Mauritius, the possibility of an independent enquiry being raised by Indian authorities cannot be fully ruled out.

This move by Mauritius can also be seen as an attempt to shed its ‘tax haven’ image, especially in the light of the OECD’s recent Action Plan on Base Erosion and Profit Shifting (BEPS) backed by the G20 countries. With tax being discussed at the highest political levels globally and many reputed MNCs being questioned on grounds of morality, clearly the expectation of each country to receive its fair share of taxes has only increased.

That said, the FSC seems to have taken a step in the right direction with the proposed amendments. However, the big question remains: is this enough?