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The India–Mauritius Double Tax Avoidance Agreement (DTAA), signed in 1983, has long been a pivotal treaty for investors due to its favourable tax terms.
For years, investors, particularly in the private equity and venture capital space, have utilised this treaty to minimise tax liabilities in India.
However, the treaty has also sparked numerous litigations and controversies, primarily concerning capital gains tax exemptions for investments made through Mauritius.
In a recent ruling, the Delhi High Court (HC) addressed a dispute concerning the application of the DTAA benefits to a Mauritius-based company, Tiger Global International.
This case clarified critical issues, including the significance of the Tax Residency Certificate (TRC), the Limitation of Benefits (LoB) clause, and the applicability of the grandfathering provision in the treaty.
The court’s decision has brought much-needed relief and certainty to taxpayers navigating the complexities of international taxation.
The case centres on Tiger Global International (the Assessee), a company incorporated in Mauritius for the purpose of making investments on behalf of Tiger Global Management LLC (TGM LLC), a Delaware-based investment manager.
The Assessee held a Category 1 Global Business License and a Tax Residency Certificate (TRC) from the Mauritius tax authorities.
Between October 2011 and April 2015, Tiger Global acquired shares in Flipkart Singapore and later transferred its holdings to Fit Holdings SARL, a Luxembourg-based entity.
The company sought clarity from India’s Income Tax Department (ITD) regarding the applicability of capital gains tax on these transactions under the DTAA.
However, the Advance Authority Ruling (AAR) ruled against the Assessee, stating that Tiger Global’s Mauritius-based structure lacked commercial substance and was merely a vehicle for *tax avoidance.
The Assessee argued that its investments were eligible for the **capital gains tax exemption** under Article 13(3A) of the DTAA.
This provision exempts Mauritian residents from Indian capital gains tax for shares acquired before April 1, 2017, and transferred thereafter.
The Assessee also relied on a Tax Residency Certificate (TRC) from the Mauritius authorities as proof of its eligibility for DTAA benefits, citing CBDT Circular No. 789, which upholds the TRC as sufficient evidence of residency.
The Assessee further contended that the Limitation of Benefits (LoB) clause, which restricts treaty benefits for entities with little economic substance, did not apply to the transactions in question because the shares were acquired prior to 2017.
They also argued that the AAR erred in questioning the motives behind the company’s establishment in Mauritius, as the purpose of incorporation should not disqualify it from treaty benefits.
The ITD took a starkly different position, arguing that the Mauritius-based entities were created solely to avoid capital gains tax in India.
The ITD asserted that TGM LLC, the US-based investment manager, exercised ultimate control and decision-making over the Mauritius entities, rendering the Mauritian companies mere intermediaries in a tax avoidance scheme.
The ITD relied on the Vodafone case, which allows the piercing of the corporate veil when an entity’s structure lacks commercial substance.
The ITD supported the AAR’s conclusion that Tiger Global International did not possess independent management and was ineligible for the DTAA benefits due to its tax avoidance motives.
The Delhi HC ruled in favour of the Assessee, providing a well-reasoned judgment that clarified the application of the India-Mauritius DTAA.
The court categorically held that TGM LLC was merely an investment manager and not the parent company of the Assessee.
The court observed that Tiger Global International was a significant entity with considerable economic activity, managing investments for more than 500 investors across 30 jurisdictions.
Regarding beneficial ownership, the court found no evidence to suggest that the Assessee was obligated to transfer revenues to TGM LLC or that it was merely acting on behalf of the US-based company.
Furthermore, the court upheld the Assessee’s Tax Residency Certificate (TRC) as conclusive proof of its eligibility for DTAA benefits, in line with earlier rulings.
Crucially, the court reaffirmed that grandfathering provisions under Article 13(3) of the DTAA would protect investments made before April 1, 2017, from the LoB clause.
This provision, the court held, was clear and unambiguous, ensuring that the General Anti-Avoidance Rules (GAAR) could not override treaty benefits.
The ruling of the Delhi High Court is a major victory for international investors who rely on the India-Mauritius DTAA for tax certainty.
The judgment clarifies that corporate structures established in tax-friendly jurisdictions should not automatically be viewed as vehicles for tax avoidance, and that the Tax Residency Certificate (TRC) holds substantial weight in determining eligibility for treaty benefits.
The decision imposes a high burden of proof on tax authorities to establish tax evasion or fraud, ensuring that only in cases of sham transactions will treaty benefits be denied.
This landmark ruling provides investors with the much-needed confidence to structure their investments in line with international treaties, reinforcing India’s position as a tax- and investment-friendly jurisdiction.
If you have any queries about this article, or Indian tax matters in general, then please get in touch.
The Alternative Minimum Tax (AMT) is a special tax system designed to ensure that high-income earners pay at least a minimum amount of tax, even if they qualify for a lot of tax breaks under the regular tax system.
The AMT was created to prevent people with very high incomes from using deductions and loopholes to avoid paying taxes altogether.
For 2024, the IRS has raised the AMT exemption, which is the amount of income that’s not subject to the AMT.
For 2024, the AMT exemption has been raised to £85,700 for single filers and £119,300 for married couples filing jointly.
This means that if your income is below these amounts, you won’t have to worry about paying the AMT.
The AMT exemption phases out for higher earners, starting at £578,150 for single filers and £1,156,300 for married couples.
If your income exceeds these thresholds, you may still have to pay the AMT.
The AMT typically affects high-income earners who claim a lot of deductions or have complex tax situations.
For example, if you claim a large number of deductions for state and local taxes, home mortgage interest, or investment losses, you might be subject to the AMT.
The AMT ensures that everyone pays at least a minimum level of tax, even if they qualify for a lot of deductions under the regular tax system.
The IRS adjusts the AMT exemption every year to account for inflation.
Without these adjustments, more and more people would be subject to the AMT over time, even if their real incomes haven’t increased.
By raising the exemption, the IRS ensures that the AMT continues to target only the highest-income taxpayers.
The increase in the AMT exemption for 2024 is good news for high-income taxpayers who might otherwise be subject to the AMT.
By raising the exemption, the IRS is helping to ensure that only those with very high incomes and large deductions will have to pay the AMT, while still ensuring that everyone pays their fair share of taxes.
If you have any queries about the Alternative Minimum Tax (AMT) 2024, or any other US tax matters, then please get in touch.
The United Nations (UN) is stepping up its role in international tax policy, aiming to create a new framework for global tax cooperation.
Historically, organisations like the Organisation for Economic Co-operation and Development (OECD) have led the way in setting international tax standards.
However, the UN’s involvement signals a shift towards giving developing countries a stronger voice in shaping tax rules, particularly as digitalisation and globalisation have created new challenges for traditional tax systems.
The UN’s new framework is expected to focus on improving tax cooperation between countries, addressing issues like tax evasion, and ensuring fair taxation of multinational corporations.
The global tax system is under increasing strain. Large multinational companies, especially in the tech sector, often pay very little tax in the countries where they generate profits.
This is largely due to tax avoidance strategies that involve shifting profits to low-tax jurisdictions.
While developed countries have been trying to address this issue through initiatives like the OECD’s Base Erosion and Profit Shifting (BEPS) project, developing countries argue that they have been left out of the conversation.
The UN believes that a new framework could help level the playing field for developing nations, allowing them to claim their fair share of tax revenues.
This is particularly important as many developing countries rely on corporate tax revenues to fund public services.
The UN’s proposed global tax framework is expected to focus on several key areas:
While the UN’s push for a new global tax framework is ambitious, it faces several challenges.
For one, many developed countries, particularly those in the OECD, are already working on their own tax reforms, including the global minimum tax under Pillar Two.
Some may be reluctant to give the UN a bigger role in tax matters, fearing that it could complicate or slow down existing efforts.
Moreover, multinational companies may push back against any rules that significantly increase their tax burden.
Countries with low tax rates, like Ireland or certain Caribbean nations, may also resist changes that could hurt their status as attractive locations for businesses.
The UN’s involvement in creating a new global tax framework is a sign that the world is recognising the need for more inclusive tax policies.
As the global economy becomes increasingly digital and interconnected, it’s important that all countries—especially developing ones—have a say in how taxes are collected.
If successful, the UN’s efforts could lead to a fairer and more transparent international tax system, where corporations contribute their fair share and countries can cooperate more effectively to combat tax evasion.
If you have any queries about this article on the United Nations New Global Tax Framework, or other international tax matters, then please get in touch.
Singapore is a major hub for international business, with many multinational companies setting up regional headquarters there.
To ensure that these companies pay their fair share of taxes, Singapore has strict transfer pricing rules. These rules govern how companies set the prices for transactions between their subsidiaries in different countries.
In 2024, the Inland Revenue Authority of Singapore (IRAS) updated its transfer pricing guidelines to reflect the latest international standards.
The updated guidelines include several key changes:
For multinational companies operating in Singapore, the updated transfer pricing guidelines mean they need to be more diligent in how they document their transactions.
The guidelines are designed to prevent companies from using transfer pricing to shift profits out of Singapore and avoid paying taxes.
The changes also align Singapore’s rules with international standards set by the OECD. This is important because it helps Singapore maintain its reputation as a transparent and compliant tax jurisdiction.
As Singapore continues to update its tax policies, companies operating in the country will need to stay up-to-date with the latest changes.
The updated transfer pricing guidelines are part of Singapore’s broader efforts to ensure that multinational companies contribute their fair share of taxes.
Singapore’s updated transfer pricing guidelines represent a significant step forward in ensuring that companies pay their fair share of taxes.
For businesses, this means more work to ensure compliance, but it also creates a fairer tax system that benefits everyone.
If you have any queries about this article on Singapore Updates Transfer Pricing Guidelines, or any other tax matters in Singapore, then please get in touch.
Corporate tax is the tax paid by businesses on their profits. Some countries, like Gibraltar, have relatively low corporate tax rates to attract companies to set up operations there.
However, due to international tax changes, Gibraltar is considering increasing its corporate tax rate to remain compliant with global standards.
Gibraltar’s current corporate tax rate is 12.5%, one of the lowest in the world. Many businesses choose Gibraltar because of this attractive tax environment.
However, the introduction of the OECD’s Pillar 2 global minimum tax—set at 15%—means Gibraltar might have to raise its tax rate to align with this international rule.
The global minimum tax is designed to prevent companies from shifting profits to low-tax countries to avoid paying taxes.
Countries with tax rates lower than 15% may have to increase them, or other countries where companies operate can “top up” the tax to meet the 15% threshold.
If Gibraltar increases its tax rate, it could still remain competitive compared to other countries, but businesses might have to adjust their tax planning strategies.
Some companies that rely on Gibraltar’s low tax rate might look for other tax-friendly jurisdictions.
On the other hand, by complying with the global minimum tax, Gibraltar will improve its reputation as a transparent and cooperative tax jurisdiction, which could attract more responsible businesses.
Companies currently benefiting from Gibraltar’s low corporate tax rate will need to evaluate how the increase will affect their profits.
They may have to pay higher taxes if the rate rises to 15%.
However, many businesses may find that Gibraltar remains an attractive place to operate, especially because of its other benefits, like a favourable regulatory environment and access to European markets.
Gibraltar’s potential corporate tax rate increase is part of a global shift towards greater tax transparency and cooperation.
While businesses may need to adjust to the new rate, Gibraltar’s continued compliance with international standards will likely strengthen its position in the global economy.
If you have any queries about this article on Gibraltar Considers Corporate Tax Rate Increase, or tax matters in Gibraltar more generally, then please get in touch.
Transfer pricing refers to the rules that govern how multinational companies set the prices for transactions between their subsidiaries in different countries.
These rules exist to prevent companies from artificially lowering their taxable income by shifting profits to low-tax countries.
Brazil is undergoing a major reform in its transfer pricing laws to align itself with international standards, specifically those set by the Organisation for Economic Co-operation and Development (OECD).
The reform aims to reduce tax avoidance by ensuring that companies operating in Brazil pay their fair share of taxes.
In 2024, Brazil passed Law No. 14596, which introduced new transfer pricing rules. These rules are designed to bring Brazil in line with OECD standards and the Base Erosion and Profit Shifting (BEPS) project.
This reform is essential because, historically, Brazil had unique transfer pricing rules that were inconsistent with global norms, which created confusion and made it easier for companies to shift profits.
One of the key changes in the new law is the arm’s length principle. This principle ensures that transactions between related parties (such as a parent company and its subsidiary) are priced as if they were between independent parties.
By applying the arm’s length principle, Brazil hopes to ensure that companies aren’t manipulating prices to reduce their tax liabilities.
The reform has significant implications for companies operating in Brazil.
Under the new rules, companies must provide more detailed documentation to prove that their transfer pricing arrangements comply with the arm’s length principle. Failure to do so could result in hefty fines and back taxes.
For multinational companies, this means they need to review their transfer pricing policies and ensure they comply with Brazil’s new rules.
The reform also creates more work for tax professionals, as they will need to help companies navigate the new requirements.
Brazil’s transfer pricing reform is part of a broader trend towards greater tax transparency and cooperation among countries.
By aligning its rules with OECD standards, Brazil is sending a message that it is serious about cracking down on tax avoidance.
This reform is expected to improve Brazil’s relationships with other countries and make it easier for foreign companies to invest in Brazil.
Brazil’s transfer pricing reform is a significant step forward in the fight against tax avoidance.
By adopting the arm’s length principle and aligning its rules with international standards, Brazil is making it harder for companies to shift profits and avoid taxes.
For businesses, this means more compliance work, but it also creates a fairer tax system.
Final thoughts
If you have any queries about this article on Brazil’s Transfer Pricing Reform, or tax matters in Brazil more generally, then please get in touch.
Non-cooperative tax jurisdictions, sometimes called “tax havens,” are countries or territories that don’t follow international tax rules.
These places can be used by people and companies looking to hide their money and avoid or evade paying taxes.
Argentina has a list of these places, and they keep an eye on which countries are cooperating and which ones are not.
If a country is on Argentina’s list, it means that companies and individuals doing business there might face higher taxes.
In September 2024, Argentina updated its list of non-cooperative tax jurisdictions.
This is something Argentina does regularly to make sure its list is up-to-date. In this latest update, Argentina removed five countries from the list.
By removing these countries, Argentina is saying that these places have started cooperating with international tax rules.
This is a good thing because it means fewer people and companies will be able to hide their money from tax authorities.
When countries cooperate on tax rules, it becomes harder for people and companies to avoid paying taxes. This means that governments can collect more money and use it to fund things like schools, hospitals, and roads.
By updating its list, Argentina is helping to create a fairer tax system, where everyone pays their fair share.
Argentina will continue to monitor other countries and update its list as needed.
For now, companies and individuals doing business with the countries that were removed from the list will have an easier time.
But for those still on the list, the higher taxes will remain in place.
If you have any queries about this article on Argentina Updates List of Non-Cooperative Tax Jurisdictions, or tax matters in Argentina more generally, then please get in touch.
The introduction of General Anti-Avoidance Rules (GAAR) into the Income Tax Act, 1961, marked a significant shift in India’s tax enforcement landscape.
Effective from the financial year 2017-18, these provisions grant the Indian Revenue Authorities (IRA) extensive powers to recharacterize transactions, disregard certain transactions, and disallow expenses if they are primarily designed to obtain tax benefits.
Despite initial concerns about their broad application, the IRA has invoked GAAR provisions sparingly.
However, the recently delivered a landmark judgment on one such GAAR-related case.
The case involved a taxpayer accused of engaging in a “bonus stripping” scheme through transactions with Crown C Supply, a building supply company owned by brothers Michael and Thomas Connelly.
This scheme typically involves issuing bonus shares and subsequently selling them to claim tax losses.
The taxpayer and a sister concern, XYZ, acquired shares of ABC at INR 115 per share.
Shortly after, the taxpayer purchased additional shares from XYZ. ABC then issued bonus shares, reducing the share value to INR 19.20 from INR 115.
The taxpayer sold these shares to another entity, PQR, claiming a short-term capital loss of INR 4,620 million.
The IRA argued that the bonus stripping arrangement was a tax avoidance scheme.
The taxpayer contended that GAAR should not apply as Section 94(8) of the Income Tax Act specifically addresses bonus stripping for mutual funds but not shares, thus falling under Specific Anti-Avoidance Rules (SAAR).
However, the Court dismissed this argument, noting that GAAR provisions, introduced through a non-obstante clause, take precedence over other sections.
The Court emphasized that the scheme was designed primarily to evade taxes and lacked commercial substance.
It cited the Supreme Court’s ruling in the Vodafone International Holdings B.V. case, reinforcing the “substance over form” doctrine, which aims to identify and disregard transactions lacking genuine business intent.
The Telengana High Court ruled that the taxpayer’s transactions constituted impermissible tax avoidance under GAAR.
It highlighted that while Section 94(8) applies to mutual funds, it does not preclude GAAR’s application to share transactions.
The Court referenced the Finance Minister’s speech during GAAR’s introduction, clarifying that GAAR or SAAR applicability would be determined case-by-case.
The judgment affirmed that the IRA can invoke GAAR in cases where the primary objective is tax avoidance, regardless of other provisions.
The taxpayer’s attempt to sidestep tax liabilities through contrived transactions was deemed invalid.
This ruling underscores the importance of ensuring transactions have genuine commercial substance.
Taxpayers must meticulously document the business rationale behind transactions, especially those yielding tax benefits, to avoid falling afoul of GAAR provisions.
The judgment serves as a reminder that while specific anti-avoidance rules exist, GAAR can be applied to a broader range of tax avoidance schemes.
Businesses should anticipate more stringent scrutiny from tax authorities and prepare accordingly.
If you have any queries about this article on the First Indian GAAR Judgment ruling, or any other Indian tax matters, then please get in touch.
The Upper Tribunal in Haworth v HMRC [2024] UKUT 00058 (TCC) upheld the interpretation of the “place of effective management” test for determining tax treaty residence, confirming that it is distinct from the “central management and control” test used to ascertain corporate residence.
The case revolved around a complex tax avoidance scheme involving corporate trustees and double tax treaties.
The case involved Jersey-based trustees of a family trust that held shares in a UK-incorporated company.
The trustees participated in a “round the world” tax avoidance scheme designed to avoid UK capital gains tax on a share disposal.
The scheme involved resigning UK trustees in favor of Mauritian trustees to dispose of shares, taking advantage of the UK-Mauritius Double Tax Treaty.
Article 4(3) of the Treaty provided a tie-breaker test for determining the residence of a person liable to tax in both contracting states, with the deciding factor being the “place of effective management.”
The trustees in Mauritius, who would not incur UK capital gains tax on the disposal, replaced the existing Jersey trustees.
The newly appointed trustees then disposed of shares, following which UK-resident trustees were reappointed. HMRC contended that the scheme was fraudulent, as the commercial reality pointed to the effective management being in the UK, negating the tax benefits claimed.
The First-tier Tribunal (FTT) applied the test for the “place of effective management,” which required considering the centre of top-level management.
It found that the trustees in the UK, along with their advisors, orchestrated and supervised the tax avoidance scheme, suggesting that the management of the trust effectively rested in the UK.
On appeal, the Upper Tribunal confirmed that the test used to determine the place of effective management differed from the central management and control test used to ascertain corporate residence.
The “top-level management” approach requires assessing where key management and commercial decisions are made, not just the location of individual trustees.
The appellants argued that the test for the place of effective management should be aligned with the central management and control test, emphasizing that the Mauritian trustees made the final decisions regarding the disposal of shares.
However, the Upper Tribunal upheld the FTT’s interpretation that the test should consider the broader circumstances, including the planning and implementation of the scheme.
The fact that certain decisions were taken in the UK and that the trustees acted under external influence was sufficient to challenge the notion of effective management in Mauritius.
The Upper Tribunal’s decision reinforces that the place of effective management test is distinct from the central management and control test.
This interpretation carries significant implications for international tax planning, as it suggests that assessing the “effective management” must consider the overall context and not just isolated decisions by trustees or corporate entities.
The ruling provides clarity on the application of the “place of effective management” test in double tax treaties, indicating that it should be interpreted with a broader perspective.
This decision could impact cross-border tax planning and the structure of trusts where treaty residence plays a critical role in tax liability.
This decision may also lead to greater scrutiny in tax avoidance schemes that rely on offshore entities to avoid UK tax liabilities.
Future cases involving the interpretation of double tax treaties will likely refer to this decision, emphasizing the importance of considering the context in which tax decisions are made.
It remains to be seen whether the case will be appealed to the Court of Appeal, which could lead to further clarification or modification of the established interpretation of the “place of effective management.”
If the Court of Appeal chooses to address the case, it could potentially depart from the decision in Smallwood, leading to a broader interpretation of tax treaty residence.
If you have any queries about this article on Haworth v HMRC, or any other UK tax matters, then please get in touch