Offshore: Have we burnt our boats?

If we have already committed ourselves to a self-destructive course, it may indeed be too late to reverse the damage done to our jurisdiction. If however there are windows open to reverse any damaging decisions that would have been endorsed, there is hope still that we could save the sector from impending disaster

There has been a lot of stir the past few days about our Double Tax Avoidance Agreement (DTA) with India.

In an interview to an Indian news channel on 5th July, the Mauritian Minister for Financial Services & Good Governance stated that a new Tax Protocol had just been signed up at the level of the India-Mauritius Joint Working Group (JWG), which consists of a body of senior officials from the two countries.

According to him, a number of hassles which have made unpredictable the operation of the DTA in past years will just go away, open up much better opportunities for both countries to enhance mutual trade and investment. He added that it is now only a matter of weeks before the political establishments of the two countries would ratify the Protocol which has been signed up at the level of officials of the JWG to smooth relations that have been ruffled up over several years.

The JWG has been struggling over many years with several economic and other issues which have kept cropping up meeting after meeting. One of these is the various contentions Indian tax officials have raised about the DTA. The latter have advocated several administrative measures, such as the introduction of General Anti Avoidance Rules (GAAR), the implied effect of which is to raise tax objections, as from a pre-determined future date, about transactions undertaken by international investors into India, even if they have been carried out under the DTA.

Capital gains realised by investors having gone into India have been challenged and numerous cases involving huge amounts of assessments by the Indian Income Tax are pending before Indian courts. In the past, Mauritius has been severally accused of favouring “round-tripping” by Indian nationals, encouraging the setting up of shell companies and abetting money-laundering, “treaty-shopping” and so forth.

Given this environment, it did not come as a surprise therefore that what has been described by some members of the new Indian government as “tax terrorism” by the Indian tax officials, to which they would like to put an end, caused a sharp drop in one of the past years in the amount of investment going into India from Mauritius. Investors going through Mauritius have to this day adopted a guarded stance until the atmosphere has been cleared.

By making uncertain the tax treatment of investments undertaken by international investors into India by the application of measures such as GAAR, the general feeling has been created over the years that the Indian tax officials are really aiming to increase the uncertainty surrounding investments going into India through the Mauritius route under the DTA. The GAAR is only the latest add-on to several destabilizing decisions targeting principally investors going into India through the Mauritius Global Business sector. In simple terms, the principal attempt has been to empty the DTA of its main attraction and substance, in fact, notably the exemption it provides international Mauritian investors going into India from having to bear capital gains tax in India.

This is why the statement made by the Mauritian Minister to the Indian news channel about the elimination of all the pre-existing hurdles built up over the years came as an unexpected surprise. Questioned about some of the burning issues – the treatment of capital gains, the non-application of Indian withholding tax on bank interest charged on facilities to global business investors, the issue of “substance” of companies operating from Mauritius and Limitation of Benefits – that Indian tax officials have been repeatedly bringing to the table, the Minister stated that all these have been sorted out.

He claimed he could not elaborate on the clauses of the new Protocol as it was still confidential but that, once it will be made public, all will see the amount of positivity it has created in the previously poisoned environment and thus launch afresh the India-Mauritius economic partnership to mutual benefit.

One would wish to believe that all this is factual and true. The reason for such a hope will be the fact that Mauritius, being a small and not so sophisticated a jurisdiction as places like Switzerland, Singapore, Dubai and London, has relied extensively on the Indian DTA to field its international financial business. Moreover, investors ask for nothing better than a clear long-term visibility about how their investments will be treated by the tax authorities of the countries in which they invest their money.

Of course, the public doesn’t know what the new Protocol holds until it is made public and there is no reason until then to doubt the assurances given by the Minister.

However, it appears that there would be some privileged individuals who have an idea of what the new Protocol provides for. By Sunday last, there were voices stating that the amendments being introduced to the India-Mauritius DTA would nullify the present regime governing the taxation of capital gains as provided for under Clause 13 of the DTA, notably that capital gains will be taxed in Mauritius. Some have gone as far as to state that the new provisions in the Protocol and/or the DTA will have the effect of killing our offshore sector altogether, including bringing under the Indian withholding tax net interest charged by lending financial institutions.

As practitioners in the offshore sector know, this provision relating to exemption from Indian capital gains tax of investments undertaken by Mauritian residents under the DTA is its principal attraction to international investors going through the Mauritius route. If it were diluted or restricted, it might have grave consequences not only for the offshore business going to India. It would also affect the sector as a whole in view of the fact that we have concentrated too much of our international financial business on India to which 60% to two-thirds of our global business investment is directed.

It remains to be seen as to which of the two versions holds the truth.

If we have already committed ourselves to a self-destructive course, it may indeed be too late to reverse the damage done to our jurisdiction. If however there are windows open to reverse any damaging decisions that would have been endorsed, there is hope still that we could save the sector from impending disaster as some would have us believe. Decision-makers would have to bear this possible SAFETY VALVE in mind.

One would have thought that the wisest course would have been to go for the negotiations with the JWG along with sound advice from practitioners in the offshore sector to avoid falling into unforeseen traps. If this has been done and the fears being ventilated are exaggerated, well and good. If we have not acted advisedly and allowed ourselves to be sacrificed to the benefit of other rival jurisdictions, however, it might be said we would have wittingly burnt our offshore boat, the fruit of so many years of unremitting struggles by a whole host of local and international professionals of the finance sector!

A Double Tax Avoidance Treaty is an instrument which binds the two governments party to it. Any one of the governments is at liberty to reject any damaging Protocol likely to sap the Treaty of its very essence. That includes the possibility for the Government of Mauritius to reject the recently signed Protocol by the India-Mauritius Joint Working Group (JWG) if it will have devastating effects on an entire sector of economic activity of the country. When disaster stands at the door, a Government is duty-bound to avert it at all costs. It should have the courage to set aside misguided advice, even if it purports to incorporate the views of its own appointed members in the JWG.

*  Published in print edition on 10 July 2015