India and Mauritius signs Limitation of Benefits (LOB) clause

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Terms Used :
Tax Haven: A tax haven is a state, country or territory where certain taxes are levied at a low rate or not at all. Individuals and/or corporate entities can find it attractive to establish shell subsidiaries or move themselves to areas with reduced or nil taxation levels relative to typical international taxation. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies
Double Taxation Avoidance Agreement (DTAA): It is a tax agreement that India has with 65 nations. It means those Nonresident Indians (NRIs) who are the residents of the country in which they stay and pay income taxes in that country are eligible to pay a lower tax on their incomes earned in India in the same financial year. For example many Indian companies have offices in Mauritius and they route their investments to India through that country because the general taxation rates are lower than compared to India. This means India gets to lose tax revenue as DTAA ensures that these investments are taxed at much lower rates than investments of the same quantity but not routed through Mauritius or any other nation with which India has a DTAA. This is called Round tripping.
This also leads to conditions conducive to money laundering. Money laundering is when the sources of money are not known. So it may be money earned through corrupt means and money meant for funding terrorist activities. Such money is called dirty money.

LOB stands for Limitation of Benefits (LOB).
It is a clause that has been included in the revised tax treaty between India & Mauritius.
LoB clauses are typically aimed at preventing ‘treaty shopping’ or inappropriate use of tax pacts by third-country investors.
Treaty Shopping: It is process by which a multinational company deliberately changes its structure so as to take maximum advantage possible from the favourable tax treaties available in certain jurisdictions.
LoB clause limits treaty benefits to those who meet certain conditions, including those related to business, residency and investment commitments of the entity seeking benefit of a Double Taxation Avoidance Agreement (DTAA).
Specific details of this LoB are not available as they are still being formulated.

India wants the LoB provision in the India-Mauritius DTAA to be similar to what it has with Singapore.
An LoB clause in the India-Singapore tax treaty requires investors coming into India through Singapore to incur minimum expenditure of $2,00,000 in the southeast Asian nation and have a track record of two years to get treaty benefits.

DTAA is already present between Mauritius and India.
It was signed in 1982 when late Indira Gandhi was India’s Prime Minister and was part of various steps initiated by the two countries at that time for strengthening the flow of investments to and from Mauritius.
But there have been concerns that Indian Ocean nation was being used for round—tripping of funds to and from India, although Mauritius has always maintained that there have been no concrete evidence of any such misuse.

Need to change the DTAA agreement between India and Mauritius has been a long pending issue as this it was signed way back in 1982.
Also, Article 13 on ‘Capital Gains’ of the India-Mauritius DTAA provides for taxation of capital gains arising from alienation of shares only in the country of residence of the investor.
India has been long asking to amend the treaty to provide source based taxation of capital gains to retain our tax base.
Indian side proposed to limit the practice of ‘treaty abuse’ by incorporating Limitation of Benefits Article in the treaty.

From many years Mauritius has been the greatest source of foreign investment in India.
But recent years have shown decline in that process.
Also, investments from Mauritius are increasingly getting diverted to Africa.
It is putting additional safeguards in place to stop wrong perceptions being made about it because of tax avoidance
It is trying to boost its image as a preferred global financial centre.
It is putting greater strict requirements for global business companies operating from its jurisdiction. Till now various companies used to take advantage of tax avoidance by just having some proxy address in Mauritius (considered as a Tax Heaven).
Struggle between the Companies & the Island nation has increased because of this decision.
To further ring-fence its jurisdiction from any attempts of round-tripping and money laundering activities, Mauritius has agreed to include a ‘limitation of benefits (LoB)’ clause in its revised tax treaty with India.
A Tax Information and Exchange Agreement (TIEA) between India and Mauritius has also been finalized.
Mauritius has today emerged as a mature International Financial Centre (IFC) and remains a preferred IFC because of its high number of experiences professionals, low operational costs and solid legal and regulatory frameworks.
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