India amends DTAA with Mauritius

On 10 May, India signed a protocol to amend its double taxation avoidance agreement (DTAA) with Mauritius. The following summarizes the amendments introduced under the protocol:

1. Taxation of capital gains on shares

Under article 13(4) of the India-Mauritius DTAA, capital gains derived by a Mauritius resident from alienation of shares of a company resident in India were subject to tax in Mauritius alone. However, the protocol amends the DTAA to source-based taxation principles. Therefore, capital gains arising on or after 1 April 2017 from alienation of shares of a company resident in India will be subject to tax in India.

However, this change is subject to the following qualifications:

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• The amendments under the protocol will not apply to a sale of shares of companies resident in India that have been acquired by Mauritius residents before 1 April 2017.
• The protocol also provides for a reduced tax rate for capital gains on the sale of shares arising between 1 April 2017 and 31 March 2019. The tax rate during this period must not exceed 50% of the domestic tax rate in India.
• The benefit above has been made subject to a “limitation of benefits” article that is proposed to be introduced to the DTAA. This article states that the benefits must only be available to Mauritius residents who are not (i) shell or conduit companies and (ii) satisfy the main purpose and bona fide business test. Further, the protocol states that a company must be deemed a shell or conduit company if its total expenditure on operations in Mauritius is less than ₹2.7 million (US$40,000) in the 12 months preceding the alienation of shares.

2. Taxation of interest income

The protocol revises article 11 of the DTAA to state that if the beneficial owner of the interest income is a resident of the other contracting state, then the tax charged on such income must not exceed 7.5% of the gross amount of interest. However, it is also important to note that the the exemption on interest income derived and beneficially owned by a bank resident in the other contracting state will continue to apply if it relates to interest income arising from debt-claims existing on or before 31 March 2017.

3. Introduction of service PE

The protocol introduces a service permanent establishment (PE) provision to the DTAA. A provision has been added to article 5 of the DTAA, stating that “permanent establishment” must also include the furnishing of services (including consultancy services) by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) for a period or periods aggregating more than 90 days within any 12-month timeframe.

4. Taxation of other income

The protocol amends article 22 of the DTAA to include “other income” within the taxing powers of a contracting state. The added language states that items of income of a resident of a contracting state that are not dealt with under the DTAA may also be taxed in that other state.

5. Fee for technical services

Through the introduction of a new article (article 12A), the protocol has introduced taxation provisions in relation to fees for technical services under the DTAA. The protocol states that fees for technical services arising in a contracting state and paid to a resident of the other contracting state may be taxed in that other state. However, the protocol also states that fees for technical services may also be taxed in the contracting state in which they arise, and according to the laws of that state, but if the beneficial owner of the fees is a resident of the other contracting state, the tax so charged must not exceed 10% of the gross amount of the fees for technical services.

6. Exchange of information

The exchange of information article (article 26) has been amended to bring it in line with international standards. Provisions such as assistance in collection of taxes and assistance in source-based taxation of other income have been introduced. The amended article specifically states that if information is requested by a contracting state in accordance with this article, the other contracting state will use its information gathering measures to obtain the requested information, even though it may not need such information for its own tax purposes.

7. Assistance in collection of taxes

These provisions have been inserted through a new article (article 26A) which states that contracting states will lend assistance to each other in collection of revenue claims. The term “revenue claim” has been defined to mean an amount owed in respect of taxes of every kind and description imposed on behalf of the contracting states, or of their political sub-divisions or local authorities, insofar as the taxation is not contrary to the DTAA or any other instrument to which the contracting states are parties. The term also includes interest, administrative penalties and costs of collection or conservancy.

The protocol states that when a revenue claim of a one of the contracting states is enforceable under the laws of that state and is owed by a person who, at that time, cannot, under the laws of that state, prevent its collection, that revenue claim must, at the request of the competent authority of that state, be accepted for purposes of collection by the competent authority of the other contracting state. Such revenue claims will be collected by the other state in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that state.