This is a huge relief for taxpayers and investors doing business cross-border with these countries.
In April 2024, India and Mauritius amended their Double Taxation Avoidance Agreement to include a provision under which revenue authorities will scrutinize exemptions available under the Treaty, subject to the principal purpose test set out in the Protocol.
What is a primary purpose test?
The Global Tax Treaty, signed by both India and Mauritius, has base erosion and profit shifting (BEPS) rules under the “Pillar 2” model that allow large multinational corporations to treat income generated in each jurisdiction. It is designed to ensure that you pay the lowest level of tax possible. They are active in.
According to the BEPS Regulations, there is a provision to deny the shelter of DTAA compensation if the principal purpose of the business arrangement is tax avoidance and is evaluated using the principal purpose test. The Protocol has been amended in line with the provisions of multilateral agreements. A treaty to implement tax treaty-related measures to prevent tax base erosion and profit shifting in which both countries participate. At that time, Mauritius did not include India as a treaty partner to which the MLI applies, and the two countries agreed to amend the treaty bilaterally.
Why is this explanation important?
The amended text of the proposed amendment specifically states that relief under the Treaty must not be for the indirect benefit of a resident of another State.
This means that revenue authorities will scrutinize the exemptions available under the Convention according to the principal purpose test set out in the Protocol.
Experts at the time noted that although the protocol would take effect from a future date, it would likely also apply to shares acquired before April 1, 2017, based on past practice.
They were concerned that for FPIs to claim the benefits of the Treaty, it was essential to demonstrate that they had sufficient non-tax legitimacy and commercial basis to be based in Mauritius.
