Amended India-Mauritius protocol on the double taxation avoidance agreement (DTAA)

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Context:

• The Income Tax Department said that the amended India-Mauritius protocol on the double taxation avoidance agreement (DTAA) is awaiting ratification and notification by the department.
• Details of amendment:
  • On March 7, 2024, India and Mauritius amended their Double Taxation Avoidance Agreement (DTAA).
  • The amendment introduced a Principal Purpose Test (PPT) to prevent tax avoidance by ensuring treaty benefits are granted only for genuine transactions.
• Concerns and Clarification:
  • Concerns arose regarding potential heightened scrutiny of investments through Mauritius and whether past investments would be affected.
  • The Income Tax (I-T) department addressed these concerns through a social media post on a platform, stating that queries regarding the amended DTAA are premature as the protocol is yet to be ratified and notified under the Income-tax Act, 1961.
  • The department assured that queries would be addressed once the protocol is in force.
• Historical Context:
  • Mauritius has historically been a preferred jurisdiction for investments in India due to the non-taxability of capital gains until 2016.
  • A revised tax agreement in 2016 allowed India to tax capital gains from transactions routed through Mauritius from April 1, 2017, with grandfathering for investments made before this date.

Note: Grandfathering of capital gains in a long-term capital gain account scheme is the exclusion of certain assets from new tax laws or new policies. In simple terms, investments made before the new policy was adopted can be 'grandfathered' or excluded from the newly adopted tax policies or rules.

• Impact of PPT Test:
  • The introduction of the PPT test is expected to lead Indian tax authorities to scrutinize transactions more closely.
  • This scrutiny may involve assessing the intent and commercial rationale behind structures and investments to determine eligibility for treaty benefits.

Double Tax Avoidance Treaty (DTAA)

• A Double Tax Avoidance Treaty (DTAA), also known as a tax treaty, is an agreement between two countries aimed at preventing double taxation of income earned in one country by a resident of the other country. These treaties typically allocate taxing rights between the two countries and provide mechanisms for relieving double taxation.

Examples of how a DTAA works:

• Example 1 - Royalties: Suppose a company in Country A earns royalties from intellectual property rights (such as patents or copyrights) located in Country B. Without a DTAA, both countries may have the right to tax these royalties, leading to double taxation. However, under a DTAA, the treaty may specify that royalties are only taxable in the country where the recipient of the royalties is a resident. So, if the recipient resides in Country A, only Country A will tax the royalties, thereby avoiding double taxation.
• Example 2 - Employment Income: Consider an individual who is a resident of Country A but works in Country B. Without a DTAA, both countries may tax the individual's employment income, leading to double taxation. However, a DTAA may provide that the income is only taxable in the country where the individual performs the services (Country B in this case), or it may provide for a credit in the country of residence (Country A) for taxes paid in the country where the income was earned (Country B).

The advantages of a Double Tax Avoidance Treaty (DTAA):

• Prevents Double Taxation:
  • The primary advantage of a DTAA is that it prevents double taxation of the same income or gains in both the country where it is earned and the country where the taxpayer resides. This ensures that taxpayers are not unfairly burdened by having to pay taxes on the same income to multiple jurisdictions.
• Promotes Cross-Border Trade and Investment:
  • DTAA provides certainty and clarity to taxpayers engaging in cross-border trade and investment by specifying the taxation rules applicable to different types of income. This clarity reduces tax-related uncertainties and encourages businesses and individuals to engage in cross-border activities, thereby promoting economic growth and international trade.
• Reduces Tax Burden:
  • By allocating taxing rights between countries, DTAA often reduces the overall tax burden on taxpayers. It may provide for exemptions, reduced tax rates, or tax credits, allowing taxpayers to minimize their tax liabilities legally.
• Enhances Taxpayer Confidence:
  • DTAA creates a framework of cooperation and mutual understanding between countries regarding tax matters. This enhances taxpayer confidence by ensuring that tax obligations are transparent, predictable, and fairly administered, thereby fostering trust in the tax system.
• Facilitates Exchange of Information:
  • Many DTAA include provisions for the exchange of information between tax authorities of the treaty countries. This helps combat tax evasion and ensures compliance with tax laws by allowing tax authorities to share relevant information about taxpayers engaged in cross-border transactions.
• Promotes International Cooperation:
  • DTAA fosters international cooperation and diplomatic relations between countries by providing a platform for negotiation and agreement on tax matters. It demonstrates a commitment to addressing tax-related issues in a mutually beneficial manner, thereby strengthening bilateral ties.
• Encourages Foreign Investment:
  • DTAA can make a country more attractive for foreign investment by providing tax certainty and reducing the risk of double taxation. This can lead to increased foreign direct investment (FDI), which can contribute to economic development, job creation, and technology transfer.
• Supports Global Mobility:
  • For individuals working or conducting business across borders, DTAA provides clarity on their tax obligations and entitlements, facilitating global mobility and talent exchange. This can benefit businesses by enabling them to deploy personnel internationally without facing excessive tax burdens.

Source

https://www.livemint.com/news/india/incometax-department-clarifies-amended-india-mauritius-tax-treaty-not-yet-ratified-notified-11712969254654.html

PRACTICE QUESTION Q) India and Mauritius recently amended their Double Taxation Avoidance Agreement (DTAA). In this context consider the following statements about the Double Taxation Avoidance Agreement (DTAA): The amendment introduced a Principal Purpose Test (PPT) to prevent tax avoidance. The primary purpose of a Double Tax Avoidance Treaty (DTAA) is to allocate taxing rights between two countries to prevent taxpayers from paying taxes on the same income or gains in both countries. If the taxpayer is a resident of one treaty country but earns income solely from another treaty country, then the situation may lead to a taxpayer being eligible for treaty benefits. How many of the above statements is/are correct? Only one Only Two All Three None Answer: C