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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This changed in 2016, with the exemption withdrawn for shares acquired after 31 March 2017.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.
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
In a significant move to adjust its tax framework, the Finance Act 2023 introduced an amendment that impacts non-residents receiving royalty and fees for technical services (FTS) in India.
Since its inception in 1974, the Income Tax Act 1961 has undergone numerous revisions, with the latest changes set to influence multinational corporations and their operations within India.
Previously, the tax rate for royalty and FTS received by non-residents was set at 10% (plus applicable surcharge and cess), as outlined in Section 115A of the Act.
This rate was momentarily increased to 25% in 2013 before being restored to 10% in 2015.
However, the Finance Act 2023 has now doubled this rate to 20% (plus surcharge and cess), effective from 1 April 2023.
The increase in the tax rate to 20% presents a significant shift for non-residents deriving income from royalty and FTS in India.
Given that many tax treaties with countries such as the United Kingdom, Canada, and the United States offer a lower tax rate of 15%, non-residents had previously opted for taxation under Section 115A of the Act due to its beneficial provisions, including specific exemptions from filing tax returns in India under certain conditions.
With the amendment, non-residents are likely to pivot towards claiming benefits under applicable tax treaties, which, while potentially offering lower tax rates, also necessitate additional compliance measures, including tax registrations in India and filing of income tax returns.
The requirement to file tax returns in India, necessitated by claiming treaty benefits, introduces a new layer of compliance for non-residents.
This includes the need for obtaining tax registrations and electronically filing Form 10F, a declaration form used by non-residents to claim treaty benefits.
Although there has been a temporary relief allowing manual submission of Form 10F until 30 September 2023, electronic filing will become mandatory thereafter, adding to the compliance burden for non-residents without a tax registration number.
Moreover, Indian payers making royalty or FTS payments to non-residents must now ensure that they collect and maintain specific documents from the non-residents to apply the treaty rates of withholding tax.
These documents include the Tax Residency Certificate, No Permanent Establishment Declaration, and the electronically filed Form 10F.
Failure to comply with these documentation requirements may result in withholding tax being applied at the higher domestic rate, along with potential penalties for the Indian payer.
The amendment could also have financial implications for Indian payers, especially in cases where royalty or FTS payments are grossed-up to cover the tax liability of the non-resident recipient.
The increased tax rate may lead to higher cash outflows for Indian payers, emphasizing the importance of efficient tax planning and compliance.
The Finance Act 2023’s decision to double the tax rate on royalty and FTS for non-residents marks an important change in India’s tax regime, aiming to align with global taxation practices.
While this may increase the tax burden and compliance requirements for non-residents, leveraging tax treaty benefits could mitigate some of these challenges.
As India continues to refine its tax laws, it is crucial for non-residents and Indian payers alike to stay informed and compliant with the evolving legal landscape.
If you have any thoughts on this article then please get in touch.
A significant development occurred on 19 December 2023 with the US Treasury Department’s announcement of the activation of the US-Chile Tax Treaty.
This Convention, formally known as the Convention Between the Government of the United States of America and the Government of the Republic of Chile for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital – a bit of a mouthful! – marks a milestone as the first new U.S. tax treaty in over a decade.
Initiated in 2010, the treaty faced an extensive delay in the U.S. Senate, primarily due to aligning it with the 2017 Tax Cuts and Jobs Act’s (“TCJA’s”) radical changes.
Finally, in July 2023, the Senate gave it the nod, incorporating two crucial TCJA-related reservations.
This ratification opened doors for Chile, positioning it as the first nation to establish a new tax treaty with the U.S. in this era.
The Treaty introduces significant reductions in withholding taxes across various domains:
For dividends issued by a U.S. corporation to a Chilean owner, the withholding rate is generally reduced to 15%.
It further drops to 5% if the recipient is a company holding a minimum of 10% of the voting stock.
Interest payments see a withholding tax cut to 15% for the first five years, post-Treaty enforcement, and 10% thereafter. Notably, for certain beneficiaries like banks and insurance companies, this rate is as low as 4%.
The Treaty caps the withholding tax on royalties at 10%, with specific exceptions.
Residents of either country selling shares in the other’s companies are taxable only in their resident nation, subject to meeting certain criteria.
Additionally, the Treaty introduces a limitation-on-benefits provision to curtail treaty shopping, aligning with U.S. treaty practices.
The Senate’s ratification came with two critical reservations, later approved by Chile’s National Congress, ensuring the Treaty’s compatibility with the TCJA:
The Treaty’s provisions on withholding taxes will be applicable to payments made or credited from 1 February 2024, onwards.
Other tax provisions will be effective for tax years starting 1 January 2024.
Additionally, the provisions for information exchange are effective immediately.
The US-Chile Tax Treaty is important as it potentially creates a template for future US tax treaties.
For persons effected by the new treaty, understanding and potentially leveraging its benefits of will be key to optimising cross-border operations.
If you have any queries regarding this article on the US-Chile double tax treaty, or US or Chile tax matters in general, then please get in touch.