Managing the Global Business Sector post 10/5

We will have to give something more to get over the substance of the DTAA which now has shifted away to India

Many have been shocked by the news about the amendment effected on 10th May to the India-Mauritius Double Tax Avoidance Agreement (DTAA). The advantages Mauritius was deriving as a global business centre looked suddenly withdrawn. We conceded at one stroke all that India has been insisting upon for long.

It has been assumed all along that the success of our global business directed towards India rests on two specific clauses of the DTAA. Article 11 relates to interest charged by Mauritius banks lending to global businesses; the favourable regime prevailing under this clause of the DTAA encourages international banks to lend extensively to global businesses investing in India. Article 13 of the DTA exempts investors investing in India from Mauritius from having to pay the Indian capital gains tax on plus values realized on the sale of their shares in Indian businesses. These two clauses have had the effect of drawing to Mauritius an ever increasing number of international investors investing in India and are seen as the main attraction of Mauritius jurisdiction for investors going into India.

The fact that Mauritius has consistently been among the largest suppliers of FDI to India over numerous years must have drawn the attention of the Indian tax authorities. Between 2000 and 2013, investors based in Mauritius contributed no less than $74 billion of direct investment to India, or around 40% of the total. This has been seen by some quarters in India as being outsized for a country like Mauritius. Factors like this have not ceased attracting negative attention to the favourable provisions of the DTA. Mauritius has been accused variously for being a “tax haven”, a route for favouring “round-tripping” of funds from India back into India and for not sharing information enough with India to help its tax officers catch the offenders.

But negotiations about setting the DTAA right between the two countries sprouted up as far back as 1996. Protracted and exhausting for both sides, to say the least. There have been several phases of attempted conciliation of the positions taken by the authorities in the two countries, unfortunately without a constructive conclusion to the satisfaction of both sides. Over time, the Indian side has become increasingly convinced that it has a strong point, even trying to employ oblique rules to empty the Treaty of its substance. Likewise, the Mauritian side has preferred to swim in its own comfort zone that the Treaty umbrella is a protection that will not be violated unilaterally – the whole world will look aggrievedly upon the one country which changes the rules of the game unilaterally! Positions taken have therefore swung towards the extremes from each side.

The amendment of the 10th May 2016 to the DTAA has removed altogether the major protection provided to Mauritian investors going into India, notably under its Articles 11 and 13 in particular. This is what the Indian side had been contemplating since long. We ought not have reached such a point had we really engaged in true negotiations with the other side in order to seek a middle-of-the-road, instead of a one-sided, solution. We could have reserved some advantages for our Global Business sector despite the tensions that had been building up. Even without the benefit of hindsight, some practitioners in Mauritius had seen the benefit of making certain concessions to the Indian side if only to keep our Global Business sector, which leans heavily on business directed towards India, free from the drastic solution imposed on 10th May on us by India with our own accord, it seems.

All is not lost as far as the past is concerned. Thus, investments which have been undertaken from Mauritius prior to 1st April 2017 will still be protected under the previous umbrella provided by the DTAA, notably as regards exemption of gains on the investments from the Indian capital gains tax. This is history, however.

So, the momentum which has supported the creation of so many jobs in past years in the global business sector will be gradually eroded. As India’s General Anti-Avoidance Rules (GAAR), along with a clause limiting benefits to investors meeting a pre-set expenditure threshold to qualify for benefits, kick in as from next year, investments going into India will have to face tougher tests to establish their clean credentials. Anyway, the temporary relief provided in respect of investments going into India will be lost by the sunset date of 1st April 2017.

It must be realized that all that India has secured is not necessarily out of a spirit of dominance of the less equipped DTAA partner, notably Mauritius. Or, simply out of mischief, taking advantage of our own weak and amateurish understanding of how finance works in practice. Pressures have also been building up within India against the benefits conferred upon foreign investors which discriminate against local investors not being placed on an equal footing.

The Indian authorities have also been repeatedly challenged about the potential abuse Indian citizens might have made of loopholes afforded by a “tax haven”. Indian tax authorities have been complaining of loss of revenues to India due to favourable tax treatment of foreign investors under the DTAA. We could have collaborated to forestall certain of all such criticisms by recourse to a conciliatory attitude. We were nearly there on quite a few occasions. But things did not happen.

Suddenly, Mauritius finds itself a victim of its own undoing, putting at risk a whole sector of activity, for not having embarked on the final give-away negotiations of 10th May, without having put in place a ‘plan de sauvetage’ in advance for the sector. Our decision-makers have been betting on alternative conceptual locations with which to do business to bridge the gap so created. Speeches are good but prior action to remedy the give-away would have been better.

Those who live in the real world know that there’s many a slip ‘twixt the cup and the lip. Nobody outside will be generous enough to cede to us its business clients; no one has done this the past so many years we’ve engaged in global business. We’ve groomed up our own manpower, established links and bridges of our own with the outside world. We’ve gone out and met ever newer challenges as and when they threatened us from outside and overcome them.

Mauritius is today confronted with a sudden constriction of its business perspectives. If it can manage to still field business to India based on the goodwill it has earned over so many years, thanks to its friendly professional relations with previous investors coming to Mauritius, it can still overcome the blind alley which has suddenly overtaken it. All depends on whether the business flow of global business towards India could somehow be restored despite the fatal arrangements now in place. It will be the new challenge before the global business sector, especially if Singapore is not unduly advantaged by the penal clauses now affecting our business with India, to generate compensating additional business for all which threatens to go away from us at present.

It means we will have to give something more to get over the substance of the DTAA which now has shifted away to India. Let the professionals of the global business sector not lose heart. Rather, they should brace up to do better despite the handicaps that have now been introduced. There’s more to it than sheer Treaty benefits. Can we prove it to the world? If we do, we will have won the bet.

* Published in print edition on 13 May 2016