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Deep knowledge, adaptability, and a client-centric focus – these are the core approaches of Tax Natives founder Andy Wood, who joins us on the Frontline Podcast.
Andy shares his journey from tax advisor to leading crypto taxation expert and how certain essential entrepreneurial qualities led him there. Let’s take a closer look at the key takeaways from the podcast and how Tax Natives can help people and businesses achieve their financial goals.
Andy began his tax advisory career in the 90s, quickly rising from a graduate scheme to founding his own practice in 2011.
Here, he discusses his desire to blend tax challenges with client-focused commercial goals and personal objectives and how Tax Natives allowed him to achieve this by offering many taxation services.
Andy notes that many entrepreneurs have short attention spans, especially regarding complex tax matters. This shaped Andy’s advisory style with Tax Natives, focusing on providing clear, concise advice with an emphasis on brevity and clarity in communications – especially for busy entrepreneurs who need to make quick decisions.
Andy’s expertise in crypto taxation has made him a highly sought-after advisor for crypto investors. But in a nascent and evolving world of crypto, this brought its own set of challenges, including the legal status of digital assets, transaction complexity, and cross-border tax issues.
Andy ends with the impact of recent non-dom changes on high-net-worth individuals and his move to Dubai for personal and professional reasons.
Want to know more about Andy’s entrepreneurial journey and gain more insight into his route to financial success? Watch the full podcast episode on the Frontline Podcast now.
The U.S. Supreme Court has affirmed the Ninth Circuit’s decision in Moore v United States, upholding the constitutionality of the mandatory repatriation tax enacted in 2017.
On 20 June 20, 2024, the U.S. Supreme Court ruled that the mandatory repatriation tax (MRT) under section 965 of the Internal Revenue Code is constitutional.
The decision might well be a narrow one. Nonetheless, it potentially also has significant implications.
The MRT was introduced as part of the 2017 Tax Cuts and Jobs Act.
It imposes a one-time tax on specific US shareholders of foreign corporations based on their pro rata share of the foreign corporation’s realized but undistributed earnings accumulated since 1986.
The Moore’s challenged the MRT under the Sixteenth Amendment, arguing that it constituted an unapportioned direct tax on property.
The Court, however, upheld the MRT based on established precedents that allow Congress to attribute undistributed (and untaxed) income realized by an entity to its equity holders and tax those equity holders on their pro rata share of the income.
The Supreme Court affirmed the Ninth Circuit’s decision, concluding that the MRT is constitutional.
This conclusion was based on long-standing precedents which assert that Congress may attribute realized income of one entity (a foreign corporation) to another person (certain US shareholders) and tax them on that income.
This ruling is notable as Moore is one of the first significant constitutional tax cases addressed by the Court in many years.
Had the Court found an affirmative realization requirement, many tax regimes under the Code, such as subpart F, GILTI, PFIC, and partnership taxation, could have been upended.
However, the Court’s “precise and narrow” decision did not extend that far.
While the decision affirms the MRT’s constitutionality, the Court did not address two critical issues:
These unanswered questions suggest potential areas for future legal challenges. Notably, the concurring and dissenting opinions revealed that at least four Justices might require a realization event for an income tax to be constitutional under the Sixteenth Amendment.
Although the decision did not declare large portions of the Code unconstitutional, it leaves the door open for future challenges to certain tax laws and policies.
The opinions expressed by the Justices indicate that areas such as wealth tax or certain income tax provisions might still be subject to scrutiny.
Taxpayers and legal experts should closely monitor developments, as Moore v United States is unlikely to be the final word on the constitutionality of various tax provisions. This decision, while maintaining the status quo, sets the stage for further debates and potential litigation in the tax law arena.
If you have any comments on this article on Supreme Court Upholds Repatriation Tax, or US tax matters in general, then please get in touch.
On 3 April 2023, the United States Tax Court ruled in Farhy v Commissioner, preventing the IRS from assessing and collecting penalties for failure to file Form 5471, the Information Return of US Persons With Respect to Certain Foreign Corporations.
This form is used to report an individual’s control over a foreign corporation.
Under US Internal Revenue Code (IRC) section 6038(b), failing to provide this information incurs a penalty ranging from $10,000 to $50,000.
In June 2021, Alon Farhy challenged the penalties imposed on him for not filing Form 5471.
The Tax Court ruled in his favor, stating that the IRS did not have the authority to assess these penalties under section 6038(b).
However, it noted that the IRS could pursue civil action to collect the penalties.
The IRS appealed this decision to the United States Court of Appeals for the District of Columbia Circuit (DC Circuit), which on 3 May 2024, reversed the Tax Court’s decision, affirming the IRS’s authority to assess and collect these penalties.
From 2003 to 2010, Farhy owned two corporations in Belize—Katumba Capital Inc. and Morningstar Ventures, Inc.
Despite knowing his obligation to file Form 5471, he willfully chose not to. After notifying Farhy of his failure, the IRS assessed penalties and issued a final notice of intent to levy when he did not respond.
Farhy requested a collection due process hearing, but the IRS upheld the penalties, leading him to petition the Tax Court, which initially ruled in his favor.
Both parties referenced IRC section 6201(a). The IRS argued that this section granted them broad authority to assess penalties as taxes.
Conversely, Farhy contended that penalties must be explicitly labeled as “tax” or “assessable” in the Code to fall under the IRS’s authority. Farhy outlined four classes of assessable penalties, arguing that section 6038(b) did not fit any of these categories.
The DC Circuit did not fully align with either party’s arguments but concluded that Congress intended section 6038(b) penalties to be assessable, citing:
Congress amended section 6038 to simplify the penalty collection process, countering Farhy’s argument that penalties should be nonassessable to limit IRS’s collection powers.
Sections 6038(b) and 6038(c) penalties work together, and making 6038(b) penalties nonassessable would complicate the process intended by Congress.
The reasonable cause exception for late filing, determined by the Secretary of Treasury, indicates that section 6038(b) penalties fall under the IRS’s assessment authority.
Farhy’s interpretation would necessitate separate proceedings for sections 6038(b) and 6038(c) penalties, potentially leading to conflicting judgments, which the DC Circuit found impractical.
The DC Circuit’s decision reversed the Tax Court’s ruling, affirming the IRS’s authority to assess penalties under section 6038(b).
Following this decision, Farhy petitioned for a rehearing, which was denied on 13 June 2024.
As of now, Farhy has not appealed to the United States Supreme Court, but given the ongoing litigation surrounding these penalties, further appeals are likely.
This case underscores the complexities of tax compliance and the importance of adhering to filing requirements for foreign assets. It also highlights the evolving legal interpretations of the IRS’s authority, which may have significant implications for taxpayers with international interests.
If you have any queries about this case Farhy v Commissioner Case, or US tax matters in general, then please get in touch.
On June 26, 2024, in PepsiCo, Inc v Commissioner of Taxation [2024], the Full Federal Court delivered a critical decision regarding the tax treatment of payments made under two Exclusive Bottling Agreements (EBAs).
The Court ruled that these payments were not subject to Royalty Withholding Tax and, by majority, also decided that the Diverted Profits Tax (DPT) would not apply.
However, in a minority opinion, Justice Colvin asserted that DPT should apply.
The Full Federal Court’s decision overturned the earlier ruling by Justice Moshinsky on November 30, 2023, which had classified portions of the payments related to beverage concentrate sales as royalties subject to Royalty Withholding Tax.
Justice Moshinsky had also ruled that DPT could apply under alternative circumstances.
PepsiCo, Inc. (PepsiCo) and Stokely-Van Camp, Inc (SVC), both US resident companies, had entered into EBAs with Schweppes Australia Pty Ltd (SAPL), an Australian company.
These agreements provided SAPL with beverage concentrate to produce finished beverages for retail in Australia, along with licenses for trademarks and intellectual property related to both carbonated and non-carbonated beverages.
The beverage concentrate was sold as a ‘kit’ containing various ingredients for blending and resale.
The Full Federal Court, comprising Judges Perram and Jackman (majority) and Colvin (minority), diverged significantly from the trial judge’s approach.
They focused on a detailed contractual interpretation of the EBAs, analyzing the central rights obtained by the parties, and referred to significant case precedents involving stamp duty and property/rights transfers.
The judges emphasized the importance of the ‘commercial and economic substance’ of the agreements over a simplistic contractual interpretation.
Given the divergence in views on critical tax issues such as ‘royalties’, ‘tax benefit’, and ‘principal purpose’ among the four Federal Court judges, it is anticipated that the Australian Tax Office (ATO) may seek leave to appeal to the High Court of Australia.
This case holds significant precedent value, particularly concerning DPT, and is closely monitored by sectors with valuable intellectual property, including Consumer Goods/Retail, Pharmaceuticals/Medical/Life Sciences, and Technology.
Perram and Jackman JJ ruled that the payments made by SAPL under the EBAs were solely for beverage concentrate and did not include any component that constituted a royalty for using PepsiCo/SVC’s intellectual property, such as trademarks.
They emphasized that the license rights granted to SAPL for using trademarks and other intellectual property benefitted both SAPL and PepsiCo/SVC by allowing SAPL to take advantage of the goodwill attached to these trademarks.
The judges noted that the contractual documents, including EBAs, purchase orders, and invoices, did not indicate that the payments were partly for the right to use trademarks.
They referred to the precedent set by International Business Machines Corporation v Commission of Taxation (2011) FCA335, supporting their reliance on the terms of the agreements.
The majority concluded that the payments were not royalties because the EBA stipulated that the license was royalty-free, at least under the SVC/EBA.
As no portion of the payments could be considered a royalty, there was no liability for Royalty Withholding Tax.
Regarding DPT, the Commissioner proposed two alternative postulates: first, that the EBA might reasonably have included payments for all property provided, including trademarks and IP rights; second, that the payments should have explicitly included a royalty for these rights.
However, the majority judges found these postulates unreasonable and concluded that the Commissioner’s arguments on DPT failed.
They noted that while the taxpayers might be seen to secure a ‘tax benefit’ under Section 177J, the Commissioner’s postulates were not reasonable alternatives.
Justice Colvin viewed the EBAs as appointing SAPL with the right to bottle, distribute, and sell branded beverages.
He argued that the trademarks were known to be valuable, and it would be commercially unreasonable to consider the EBAs as involving no consideration for these trademarks.
Therefore, he believed a portion of the payments should be classified as royalties.
However, Colvin J. agreed that because the Seller was nominated under the EBAs, the amounts paid were not derived by PepsiCo/SVC, and thus no Royalty Withholding Tax was applicable.
Justice Colvin also believed that the EBAs should have explicitly provided for the payment of royalties to PepsiCo/SVC, resulting in a ‘tax benefit’ with the principal purpose of achieving this benefit.
Hence, he concluded that DPT should apply.
The Full Federal Court’s ruling has significant implications for the classification and tax treatment of payments under similar agreements.
The decision underscores the importance of detailed contractual analysis and the economic substance of transactions over simplistic interpretations.
While the majority ruling favored PepsiCo, the minority opinion highlighted potential areas of contention that could influence future tax assessments and legal interpretations.
Given the potential for an appeal to the High Court, this case may continue to shape the landscape of international tax law and intellectual property transactions in Australia.
If you have any queries about the PepsiCo case, or other Australian tax matters, then please get in touch.
They must have thick skin, those HMRC people.
I sometimes wonder whether it’s provided when they join or if it accumulates over their time in post.
After all, it takes either fortitude or tone deafness to keep going in the face of seemingly endless criticism.
This year alone, among other things, HMRC has been accused of allowing customer service to plummet to an all-time low and performed a rapid about-face over proposals to hang up its helpline during the summer months.
Yet there are times when persistence appears to pay off.
Take the Diverted Profits Tax (DPT), for instance, which (whisper it!) looks as though it may be changing the kind of corporate shenanigans on the part of big multi-national businesses which in the past has enabled them to minimise the amounts which they make to the Revenue.
The tax came into effect in 2015. Whilst not applying to small and medium-sized enterprises (SMEs), it is a means of countering the exploitation of overseas offices (or ‘permanent establishments’, as they’re otherwise known) to artificially reduce their UK profits and tax liabilities.
For organisations with the kind of turnover and structures which make it possible, such paper shuffling can be incredibly lucrative.
There is a sting in the tail, though.
Get caught and the sanctions – including a six per cent surcharge on top of the normal Corporation Tax rate – can be enormous. An even higher rate of 55 per cent exists in respect of specific profits in the oil industry.
Figures released last month by HMRC show that DPT generated more than £8.5 between its introduction and March last year
The Revenue’s notable scalps include the likes of the drinks giant Diageo which agreed to hand over £190 million in 2018, a settlement which I discussed with The Times at the time .
Realising that it was onto a winner, HMRC subsequently turned those thumbscrews even tighter, launching something called the Profit Diversion Compliance Facility (PDCF) the following year.
It aimed to “encourage” companies identified by some of the near 400 Revenue staff working on international tax issues as having operations which might trigger a DPT liability to “review both the design and implementation” of their policies and pay any tax due.
In short, it offers a chance to ‘fess up to any mischief and avoid being hauled over the coals and, given that it’s eked more than £732 million extra income for the Revenue, could be said to have demonstrated its worth.
Cynics might suggest that the DPT performance record, in particular, indicates that its novelty is wearing off.
The £108 million recovered in the last financial year was less than half the sum reclaimed only 12 months before.
However, I take the opposite view.
I think it is evidence that instead of using offices in far-flung corners of the globe to manipulate their balance sheets and mitigate their UK tax bills, multi-nationals accept that they now have nowhere to hide.
Of course, that is not solely down to HMRC’s efforts.
The Organisation for Economic Co-operation and Development (OECD) has, since DPT was introduced, also unveiled the Global Minimum Tax (GMT) as part of its campaign to eradicate the use of profit shifting which led to the Diverted Profits Tax.
This new measure means that multi-nationals turning over more than €750 million (£633.38 million) will be subject to a minimum 15 per cent tax rate wherever they operate in the world.
It amounts to a combination, one-two punch for the UK tax authorities, in particular. The DPT can still address individual methods not covered by the GMT’s more broad brush approach.
However, the extent to which the UK will retain DPT is perhaps up for debate as well.
To all that, we can add the Revenue’s intention, announced in January, to actually reform DPT, making it part of the wider Corporation Tax for the sake of simplicity – something which in itself is a novel and noble development in UK tax procedures.
There are, I should point out, still some companies which appear reluctant to accept that the diverted profits game is up.
The latest detailed HMRC missive describes how it “is currently carrying out about 90 reviews into multinationals with arrangements to divert profits”, inquiries which involve some £2.6 billion in potentially unpaid tax.
Furthermore, the Revenue is involved in “various international tax risk disputes where the business was not prepared to change their arrangements”. Embroiled in those proceedings led by HMRC’s Fraud Investigation Service “are a number of large businesses” who face possible civil or criminal investigation.
It may well be that corporate titans once inclined to accounting mischief have just been worn down by the Revenue’s dogged investigators.
A change in personnel on the boards of these companies coupled with the prospect of a process lasting five years and a large penalty can also persuade even the hardiest souls to call a halt to such behaviour.
Even those who remain resistant to the newly knighted Jim Harra and his colleagues can’t escape the potential reputational damage arising from the leak of sensitive documentation as has happened successively with the Pandora, Paradise and Panama Papers.
Now that HMRC is finally and effectively calling the tune, there is – with no little apologies to Axl Rose and his bandmates – less of an appetite for diversion.
That is a situation for which and for once the Revenue deserves credit.
Thanks for your patience.
If you have any queries about this article on the UK’s diverted profit tax, or other UK tax matters, then please get in touch.
Look what you’ve reduced me to….
The Tax Court’s recent ruling in the case of ABD Limited v Commissioner for the South African Revenue Service (CSARS) has marked a significant shift in how South Africa approaches disputes over transfer pricing.
In today’s global economy, Multi-National Enterprises (MNEs) face the complex challenge of navigating international tax and compliance rules, with transfer pricing being a crucial issue.
Adhering to the “arm’s length principle” is vital for MNEs to avoid penalties for non-compliance, especially when launching new subsidiaries abroad or expanding existing ones.
Despite the well-established international guidelines laid out by the Organisation for Economic Co-operation and Development (OECD), many MNEs face frequent scrutiny through transfer pricing audits.
This often results from insufficient tax and legal structures to support transactions between related entities.
The recent ruling by the Tax Court in the case of ABD Limited v CSARS (14 February 2024) highlights the delicate nature of transfer pricing disputes in South Africa.
In this case, the court ruled in favor of ABD Limited, shedding light on the complexities involved in such legal proceedings.
The core issue was the licensing of Intellectual Property (IP) to subsidiaries, a common practice among MNEs in industries like telecommunications and software.
The dispute involved the royalty payments made by the fourteen Opcos of ABD Limited from 2009 to 2012. ABD Limited charged all its subsidiaries a uniform royalty rate of 1% for the right to use its intellectual property, based on expert advice and supported by a benchmarking study.
The South African Revenue Service (SARS), acting on expert advice, argued that ABD Limited should have charged a variable royalty rate based on the country and the year of assessment.
SARS contended that the differences created by adopting this approach were significant on both a country and year-by-year basis.
They sought a court order under section 129(2)(b) of the Tax Administration Act (TAA) to adjust the additional assessment to reflect the variable rates.
Despite initial challenges from SARS, the court’s ruling validated ABD Limited’s pricing strategy.
The court upheld the flat 1% royalty rate charged to all subsidiaries, as the arm’s length nature of the royalty rate was also supported by the same rate charged to an unrelated entity in Cyprus.
This case underscores the importance of solid legal arguments backed by comprehensive evidence, such as annual transfer pricing documentation (local file and master file) and relevant comparability analyses to substantiate the arm’s length nature of the taxpayer’s cross-border intercompany transactions.
To mitigate the risk of non-compliance and navigate the complexities of transfer pricing regulations, MNEs must assemble a skilled team of tax advisors, legal experts, and financial analysts.
By proactively addressing transfer pricing obligations and implementing best practices, companies can protect their operations from potential audits and ensure alignment with regulatory requirements.
The case of ABD Limited v CSARS highlights a significant development in South Africa’s approach to transfer pricing disputes.
It emphasises the need for MNEs to maintain robust documentation and comprehensive legal strategies to defend their transfer pricing practices effectively.
If you have any queries on the case of ABD Limited v CSARS, or South African tax matters more generally, then please get in touch
On February 16, 2024, the Zakat, Tax, and Customs Authority (ZATCA) released new Regional Headquarters (RHQ) rules in Saudi Arabia.
These rules supplement the existing Zakat/Tax Law provisions and the Ministry of Investment of Saudi Arabia (MISA) guidance published in February 2022, offering tax incentives for businesses establishing their RHQs in the Kingdom of Saudi Arabia (KSA).
RHQs that meet the criteria set by MISA and ZATCA will enjoy the following tax incentives:
The timing of these new rules is helpful as, since January 1, 2024, businesses must have had to have their RHQ located in KSA in order to bid for government contracts (with some exceptions).
The following are Eligible RHQ Activities**
In order to qualify, the activities must commence within six months of receiving the RHQ license.
Three of the following optional activities must commence within the first year of receiving the RHQ license:
RHQs engaging in non-eligible activities must maintain separate accounts for these activities, allocating income between eligible and non-eligible activities as if they were independent.
To qualify as an RHQ, the following key conditions must be met:
Failure to meet these conditions can lead to fines and potentially the cancellation of the RHQ license by MISA.
The rules also introduce several administrative requirements:
RHQs must comply with the TP Bylaws issued by ZATCA. Key considerations include:
Special consideration should be given to TP arrangements to meet regulatory requirements and receive the tax benefits offered under the RHQ program.
The new RHQ rules provide substantial tax incentives and administrative benefits for businesses establishing their regional headquarters in KSA.
These incentives aim to attract multinational companies and enhance KSA’s position as a regional business hub.
Businesses planning to establish an RHQ in KSA should carefully review the new rules and consider the TP arrangements to ensure compliance and maximize tax benefits.
If you have any queries on this article on KSA Regional Headquarters Tax, or tax matters in Saudi Arabia in general, then please get in touch.
The Ministry of Finance (MoF) of the United Arab Emirates (UAE) held a public consultation to gather feedback on the implementation of the Global Anti-Base Erosion (GloBE) Model Rules, known as Pillar Two.
This consultation which started on 15 March 2024 and ended on 10 April 2024 aimed to refine the draft policy for applying these international tax rules within the UAE.
The consultation process was designed to collect insights from stakeholders on various aspects of the GloBE Rules implementation.
This includes the potential establishment of the Income Inclusion Rule (IIR), the Undertaxed Profits Rule (UTPR), and a Domestic Minimum Top-up Tax (DMTT).
These discussions are pivotal as they will influence how multinational enterprises (MNEs) with substantial revenues are taxed, ensuring they meet a global minimum tax rate of 15%.
The MoF had provided two main documents for review:
Pillar Two aims to ensure that MNEs with consolidated revenues exceeding EUR 750 million pay a minimum tax rate of 15% in each jurisdiction they operate. This is enforced through two mechanisms:
The public consultation seeks feedback on several critical aspects:
For foreign entities and partnerships, the rules specify that these entities must be transparent, meaning profits pass through to the partners who are then taxed individually, subject to certain conditions including effective tax information exchange with the UAE.
The consultation clarifies that the GloBE Rules will primarily target large MNEs but provides room for applying these rules to smaller groups based on strategic economic considerations.
The application of these rules is not intended to impose undue burdens on smaller MNEs headquartered in the UAE.
The consultation process conclude on 10 April 10, 2024.
Undoubtedly, this was a critical step in adapting the global tax reform initiatives to fit the UAE’s unique economic landscape.
By actively seeking input from stakeholders, the UAE MoF aims to craft a regulatory environment that is fair, competitive, and compliant with international standards.
The feedback gathered will play a substantial role in finalizing the UAE’s approach to implementing the GloBE Rules, potentially affecting a wide range of companies and the overall investment climate.
This initiative reflects the UAE’s proactive stance in aligning with global tax reform efforts while considering the impact on its national economic interests.
If you have any queries on this article on the UAE Public Consultation on Implementing Global Minimum Tax, or UAE tax matters in general, then please get in touch.
Malta has introduced a special 12% VAT rate for yacht charters commencing in the region as of January 1, 2024, significantly lower than the standard 18% VAT rate.
This strategic move, detailed in Legal Notice 231 of 2023 under the Value Added Tax Act (Amendment of Eight Schedule) Regulations, 2023, aims to bolster the local superyacht industry.
The Malta tax authorities have published guidelines to facilitate the industry’s understanding and application of these new regulations.
Additionally, Transport Malta issued a Port Notice emphasizing exemptions for visiting yachts from the Commercial Vessels Regulations, provided they are registered for commercial use and comply with their flag state requirements.
To qualify for the reduced 12% VAT rate, several conditions must be met:
The guidelines also address the concept of composite supplies in VAT applications.
If a taxable person offers mixed supplies of goods and services, these might be considered a single composite supply for VAT purposes if they are primarily related to the yacht charter.
Thus, the special 12% VAT rate applies to such composite supplies provided they are integral to the charter service.
This reduced VAT rate is expected to enhance Malta’s attractiveness as a premier yachting destination, encouraging more high-value tourism and reinforcing its maritime services sector.
Yacht charter businesses should review these conditions and guidelines to ensure compliance and optimize their operations under this new fiscal framework.
If you have any queries about the Special 12% VAT Rate for Yacht Charters in Malta then please get in touch.
India and Mauritius have signed a new protocol, dated 7 March 2024, amending the India-Mauritius tax treaty.
The protocol introduces a Principal Purpose Test (PPT) to address concerns about treaty shopping and tax avoidance.
This amendment aims to close loopholes and ensure that the tax treaty is not used for non-taxation or reduced taxation through tax evasion or avoidance.
The exact application and potential retrospective effect of these changes are not yet clear, but the amendment reflects a significant shift in India’s approach to tax treaties.
Mauritius has been a popular route for investments in India due to favorable tax provisions and no local taxes on capital gains.
Previously, the India-Mauritius tax treaty exempted capital gains earned by Mauritian residents from the sale of shares in Indian companies.
This changed in 2016, with the exemption withdrawn for shares acquired after 31 March 2017.
The shares acquired before that date were “grandfathered,” allowing capital gains tax exemption on their sale, regardless of when they were sold.
However, anti-abuse conditions were not part of the treaty’s 2016 amendments.
India has already introduced General Anti-Avoidance Rules (GAAR) into its domestic tax laws, effective from 1 April 2017, which aim to prevent tax avoidance by focusing on substance over form.
GAAR gives tax authorities the power to deny tax benefits if the main purpose of an arrangement is to obtain a tax benefit without commercial substance.
Additionally, India ratified the Multilateral Instrument (MLI) in 2019, an OECD initiative to combat base erosion and profit shifting.
MLI includes the Principal Purpose Test (PPT), which can deny tax treaty benefits if one of the principal purposes of an arrangement is to obtain a tax benefit inconsistent with the treaty’s purpose.
However, the India-Mauritius tax treaty was not part of MLI’s covered tax agreements, making this latest protocol significant for incorporating PPT.
The new protocol introduces anti-abuse conditions directly into the India-Mauritius tax treaty:
Benefits such as concessional withholding tax rates and capital gains tax exemptions will now be subject to the PPT. This means that if the primary purpose of an arrangement is to obtain a tax benefit, it can be denied.
The protocol expands the objects and purposes of the tax treaty to prevent non-taxation or reduced taxation due to tax evasion or avoidance, specifically targeting treaty shopping arrangements.
The protocol will take effect once both the Indian and Mauritian governments notify it according to their domestic laws. The exact application and potential retrospective effect are not yet clear.
The introduction of PPT into the India-Mauritius tax treaty aligns with international efforts to curb tax evasion and treaty shopping.
However, this move deviates from the approach taken in 2016 when the treaty was amended without introducing anti-abuse conditions.
There are concerns about the potential retrospective application of the PPT and its impact on previously grandfathered investments.
The lack of clarity on whether the amendments could apply to past transactions has raised concerns about investor sentiment and the stability of the tax treaty.
Given the Supreme Court of India and other courts’ rulings affirming treaty entitlement for Mauritian investors based on valid tax residency certificates, the retrospective application of the PPT could unsettle these rulings.
While the protocol’s intent is to prevent abuse, clarity on its application and potential retrospective effect is essential.
It is hoped that the government will provide further guidance to allow investors to understand and adapt to the new requirements.
If you have any queries about this article – India Amends Tax Treaty with Mauritius – or any other tax matters in India, then please get in touch.