TAX NOTE India-Mauritius Tax Treaty The Government of Mauritius issues GN 156 of 2016 in the view to enact changes to the double taxation agreement with India Ref. SUTSL/TXN/001/20160810 SAFYR UTILIS TAX SERVICES LTD 7 th Floor, Tower 1, NeXTeracom Cybercity Ebene Republic of Mauritius Tel: +230 403 4250 Fax: +230 468 1178 Web: www.syul.mu Email: contact@syul.mu SAFYR UTILIS TAX SERVICES LTD 2016 TAX NOTE Ref. SUTSL/TXN/001/20160810 India-Mauritius Tax Treaty Page 1 of 7
India-Mauritius Tax Treaty The Government of Mauritius issues GN 156 of 2016 in the view to enact changes to the double taxation agreement with India On 23 July 2016, the Government of Mauritius issued the Double Taxation Convention (India) (Amendment) Regulations 2016 (GN No. 156 of 2016) (also referred to as the Protocol ) which will amend the Convention between the Government of Mauritius and the Government of the Republic of India for the avoidance of double taxation (the IM Treaty ) signed on 24 August 1982. The Protocol shall come into operation on such date which the Government of Mauritius will specify by way of a notice published in the Government Gazette (the Notice ). Article 46(4) of the Constitution of Mauritius provides that laws may be enacted with retrospective effect. Whilst it is expected that the Notice, fixing the date of the coming into operation of the Protocol, will be published at a later stage during the year, in all reasonable likelihood, the effective date of the Protocol may be retrospective. We provide hereunder a summary of the salient changes which would be made to the IM Treaty and a table which provides the corresponding tax implications, from a payor perspective, following the changes in the IM Treaty. AMENDMENTS TO EXISTING PROVISIONS OF THE IM TREATY Interest payments on debt claims (Article 11) Tax payable on interest arising in the State of the borrower (the Borrowing State ) cannot exceed 7.5%. Interest arising in the Borrowing State and payable to banks, which are resident in the State of the lender (the Lender State ), would no longer be exempt from tax in the Borrowing State; a grandfathering provision allows the exemption to prevail for bank related debts availed on or before 31 March 2017. Capital gains (Article 13) Gains arising from the alienation of shares held in a company can also be taxed in the country in which the company is resident. Where such gains arise on or after 1 April 2017 and ending 31 March 2019 ( the grandfathering provision ), the tax rate applicable in the country of residence of the company, whose shares are being disposed of, cannot exceed 50% of the tax rate applicable in that country of residence. This provision would apply in Mauritius as from 1 July 2017. SAFYR UTILIS TAX SERVICES LTD 2016 TAX NOTE Ref. SUTSL/TXN/001/20160810 India-Mauritius Tax Treaty Page 2 of 7
Other income (Article 22) Other income, not expressly dealt with in the IM Treaty, can also be taxed in the country in which the income arose. Exchange of information (Article 26) The exchange of information between the two States shall extend to taxes beyond those covered under the IM Treaty. Such information can be disclosed to courts and administrative bodies concerned with the assessment or collection of taxes and can be used for other purposes subject to the approval of the local competent authority. The supply of information shall be mandatory even if it is kept by banks or other financial institutions nominees or persons acting in an agency or fiduciary capacity. This provision would apply as from the date the Protocol is in force. INTRODUCTION OF NEW PROVISIONS TO THE IM TREATY Permanent establishment (Article 5) Should services be provided in the country (the Source Jurisdiction ), through employees or other personnel, for a period of 90 days within any 12 month period, it would constitute a permanent establishment ( PE ) such that the PE would be subject to tax according to the rules of the Source Jurisdiction. Technical fees (Article 12A) Technical fees arising in either Mauritius or India may be taxed in the country in which the beneficiary of the services is resident. The tax rate on technical fees cannot exceed 10%. Technical fees are defined as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel. The scope of the technical fees does not include fees payable to professional service providers acting in an independent personal capacity and salaries payable to employees. SAFYR UTILIS TAX SERVICES LTD 2016 TAX NOTE Ref. SUTSL/TXN/001/20160810 India-Mauritius Tax Treaty Page 3 of 7
Technical fees (Article 12A) (Contd.) Where the technical fees are attributable to a fixed base or permanent establishment, then the tax treatment of the said fees would be subject to the rules of taxation on business profits or independent personal services under the IM Treaty. Assistance in the collection of taxes (Article 26A) The two States shall assist each other in the collection of unpaid taxes whose definition is extended to taxes beyond those covered under the IM Treaty. Competent authorities shall be allowed to take measure of conservancy in cases of unpaid taxes according to the rules of their State as if the claim arose in their State; the time limits applicable according to the rules of that State should not apply. This provision would apply as from the date the Protocol is in force. Limitation of benefits (Article 27A) The grandfathering provision on capital gains shall not apply in cases where the primary purpose was to take advantage of this benefit; a shell/conduit company shall not benefit from this provision. A shell/conduit company is defined as a company whose expenditure in its state of residence is less than MUR 1,500,000 or INR 2,700,000 in a period of 12 months before the gains arose. A company listed on the Stock Exchange shall not be construed to be a shell/conduit company. SAFYR UTILIS TAX SERVICES LTD 2016 TAX NOTE Ref. SUTSL/TXN/001/20160810 India-Mauritius Tax Treaty Page 4 of 7
We provide hereunder a table which summarizes the changes in the tax implications, from a payor perspective, subsequent to the changes to be made to the IM Treaty. Article of the Treaty Mauritian Tax on payment/gains Pre GN 156 of 2016 Post GN 156 of 2016 Indian Tax on Mauritian Tax on payment/gains payment/gains Indian Tax on payment/gains Dividends* 10 0% 0% Interest- Non bank 11 loan* of 15% of 7.5% of 20% on foreign currency /40% on INR loans (a) of 7.5% Interest- Bank loan 11 of 7.5% (b)** Royalties* 12 of 15% of 10% (a) of 15% of 10% (a) Technical fees 12A 0% 10% (a) of 10% (f) of 10% Capital gains on sale of shares 13 Gains on sale of shares in Indian exempt in both countries (c) Gains on sale of shares in Mauritian taxable in India but exempt in Mauritius (d) Gains on sale of shares in Indian taxable in India but exempt in Mauritius (e) Gains on sale of shares in Mauritian taxable in India but exempt in Mauritius (d) * Where the Mauritian payor holds a Category 1 (subject to conditions) or 2 Global business license, interest payments and royalties are exempt from withholding tax. **withholding tax of 5% applies subject to satisfaction of specified conditions a) The rate is increased by a surcharge of 2% (when the aggregate income exceeds INR 10 million) or 5% (when the aggregate income exceeds INR 100 million) and is further increased by an education cess of 3% (on income tax and surcharge). Other rates may apply depending on certain circumstances and can reach up to 40% (excluding surcharge and cess). b) Interest arising on debts existing on or before 31st March 2017 would be exempt from withholding tax. c) Before the changes to the IM Treaty, the taxing rights on gains on sale of shares by a Mauritian resident in an Indian Company laid with Mauritius. Since Mauritius does not impose tax on capital gains, such gains were exempt from tax. d) Long term capital gains on sale of shares would be taxable at either 10% or 20%, as the case may be. Long term gains on sale of shares listed on the Indian Stock Exchange are exempt from tax. Short term capital gains are taxed at the rate of 15% if Securities Transaction Tax (STT) is paid, otherwise the tax rate would be either 30% or 40% as the case may be. The rates above exclude surcharge and cess. The table below provides a summary of the rates which could apply. SAFYR UTILIS TAX SERVICES LTD 2016 TAX NOTE Ref. SUTSL/TXN/001/20160810 India-Mauritius Tax Treaty Page 5 of 7
Long term Quoted provided STT paid Long term quoted no STT Domestic tax rate in India 0% 10% without /20% with Investments pre 31.03.2017 Investments between 01.04.2017 31.03.2019 (50% of full rate) 0% / 0% 5% without /10% with Investments post 01.04.2019 0% 10% without /20% with Short term quoted provided STT paid Long term unquoted 15% 10% 40% 7.5% 5% 20% 15% 10% 40% Short term unquoted * Surcharge and cess will apply on all the above basic tax rates e) Before the changes to the IM Treaty, the taxing rights on gains on sale of shares by a Mauritian resident in an Indian Company now also lies with India. See (d) above for potential tax on capital gains in India. Where such gains arise on or after 1 April 2017 and ending 31 March 2019, the capital gains taxes in India cannot exceed 50% of the capital gains taxes which would have been paid in India. f) The rate of 10% would apply where the services are rendered in Mauritius. Whilst comparing the various tax treaties, it is important to understand the relative positions. In respect of Article 13, the changes provide certainty as to the treatment of taxation of capital gains under the Mauritius India, unlike Singapore where an agreement is yet to be reached. As for interest payments, Mauritius now has the most favorable withholding tax rate with India. Disclaimer: This note is intended for general guidance only. It does not constitute and should not be construed as tax and/or legal advice. Whilst all reasonable care and effort have been made to ensure that the information presented is accurate, no responsibility for the correctness and accuracy of such content is assumed by Safyr Utilis Tax Services Ltd. SAFYR UTILIS TAX SERVICES LTD 2016 TAX NOTE Ref. SUTSL/TXN/001/20160810 India-Mauritius Tax Treaty Page 6 of 7
SAFYR UTILIS TAX SERVICES LTD 7 th Floor, Tower 1, NeXTeracom Cybercity Ebene Republic of Mauritius Tel: +230 403 4250 Fax: +230 468 1178 Web: www.syul.mu Email: contact@syul.mu SAFYR UTILIS TAX SERVICES LTD 2016 TAX NOTE Ref. SUTSL/TXN/001/20160810 India-Mauritius Tax Treaty Page 7 of 7