India-Mauritius Current Affairs - 2019
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As per the data of the Department of Industrial Policy and Promotion (DIPP), during the financial year 2013-14, India received $5.98 billion in FDI from Singapore, whereas it was $4.85 billion from Mauritius. With this, Singapore has replaced Mauritius as the top contributor to India’s FDI. FDI inflow recorded in 2013-14 is the highest ever received from Singapore since 2006-07 which accounts for around 25% of total FDI inflow in India.
Experts believe that the Double Taxation Avoidance Agreement (DTAA) with Singapore incorporates Limit-of-Benefit (LoB) clause which has provided comfort to overseas investors based there. LoB clause in India-Singapore treaty justifies the substance in Singaporean entities, bringing certainty and avoiding possibilities of litigations.
FDI inflows from Mauritius have begun enervating on apprehensions over the impact of General Anti Avoidance Rules (GAAR) and possible re-negotiation of the tax avoidance treaty. The debatable General Anti Avoidance Rules provision, which seeks to curb tax avoidance by investors routing their funds through tax havens, will come into effect from April 1, 2016 in India. The rule will be applicable to entities claiming tax benefit of at least Rs 3 crore. It will apply to Foreign Institutional Investors (FIIs) that have claimed benefits under any DTAA.
The DTAA signed between India and Mauritius DTAA is under revision amid concerns that Mauritius is being used for round-tripping of funds into India even though that country has always maintained that there have been no strong evidence of any such misuse.
Mauritius and India agreed on the principle of including a Limitation Of Benefit (LOB) or anti-treaty shopping law clause in the revised tax treaty to ring-fence its jurisdiction from any attempts of round-tripping and money laundering activities.
The 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).
What is Limitation Of Benefit (LOB) provision ?
- An anti-abuse provision that sets out where residents of the Contracting States are entitled to the treaty’s benefits
- Purpose : Aimed at preventing ‘treaty shopping’ or inappropriate use of tax pacts by third-country investors.
- To limit the ability of third country residents to obtain benefits under the said treaty.
- India’s desire is to discourage ‘Treaty shopping’ by the ‘LOB’ policy.
What is ‘Treaty shopping’ ?
The practice of structuring a multinational business in order to take advantage of more favorable tax treaties available in certain jurisdictions. A business that resides in a home country and not having a tax treaty with the source country (from which it receives income), can establish an operation in a second source country having a favorable tax treaty, in order to minimize its tax liability with the home country.