India Will Try Again To Prevent 'Treaty Shopping'

by Mary Swire, Tax-News.com, Hong Kong

29 December 2008

The Indian government is expected to use its new direct tax code to attempt to prohibit so-called ‘treaty shopping’. The Mauritius-India treaty in particular has come under intensified scrutiny recently.

Treaty shopping happens when a national or resident of a third country seeks to obtain the benefit of a double tax agreement between two other countries by interposing a company or other entity in one or the other of them. The new direct tax code, which is expected to be finalized in 2009, will attempt to stop this practice.

In the case of Mauritius, capital gains tax on investments in Indian securities is payable in Mauritius, which currently operates a 0% capital gains tax rate, effectively allowing those who are domiciled in Mauritius exemption from tax on capital gains from trading in India.

India has been trying to get Mauritius to change the countries' Double Tax Treaty for at least five years, but negotiations have not been successful. It is not clear that any unilateral action on India's part short of abrogation of the tax treaty will make any difference to the situation.

The Indian tax authorities huff and puff over the Mauritian tax treaty from time to time; but the rest of the government is very happy about the substantial direct foreign investment that flows in, largely because of the tax treaty, and is unlikely to support abrogation of the treaty.

The addition of a 'GAAR' (General Anti Avoidance Rule) to the tax code may however give the tax authority a new weapon to use in its fight against improper use of tax treaties.

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