India and Mauritius signs Limitation of Benefits (LOB) clause
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.
WHAT IS LOB ?
⇒ 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.
WHAT TYPE OF LOB INDIA WANTS ?
⇒ 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.
POSITION OF DTAA WITH MAURITIUS
⇒ 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.
AMENDMENTS TO DTAA TREATY OF 1982
⇒ 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.
ABOUT MAURITIUS INVESTMENTS
⇒ 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.