Mauritius is in talks to review a tax treaty that has made this island nation of just 1.3 million people the biggest single source of foreign direct investment (FDI) in India, a nation of 1.3 billion people, Maruritian Finance Minister Seetanah Lutchmeenaraidoo said on Wednesday.
The Double Taxation Avoidance (DTA) treaty, signed in 1983, has been a cornerstone of Mauritius’ rise as a financial centre and its diversification away from the Indian Ocean island’s traditional businesses, such as sugar cane growing and tourism.
But the deal’s terms have been a growing irritant to India, which says a chunk of the funds are not real foreign investment but Indians routing cash through the island to avoid Indian taxes, a practice known as “round tripping”.
“There are talks now on the review of the treaty,” Lutchmeenaraidoo told Reuters in his first interview since his appointment to a new government after a December election. “We haven’t finalised anything yet.” He did not give a timeline for a deal, but said a main issue was to ensure a firm investing in India spent, or “added value”, in Mauritius of at least 1.5 million Mauritian rupees ($42,300) a year before enjoying zero capital gains tax in the country.
New Delhi wants to ensure firms in Mauritius that invest in India are not just “shell” companies comprising little more than post office boxes, and instead have substantial operations in the island, such as paying staff there, before qualifying for treaty terms that mean they avoid paying Indian capital gains tax.
In fiscal 2014-15, FDI to India was $24.7 billion, with about 24 per cent from Mauritius, the biggest single FDI source, RBI provisional figures show. Mauritius accounted for 44 per cent of FDI in 2012-13.
India’s concern touches on a broader international debate on how to stop firms using “tax havens”, or centres boasting low taxes and a network of international treaties, solely to avoid higher taxes in countries where they invest.