Singapore Wants India To Improve Double Tax Agreement

by Lorys Charalambous, for LawAndTax-News.com, Cyprus

16 March 2006

Singapore and Mauritius are vying to be the dominant conduit country for Indian FDI, and Singapore is expected to ask India to improve the terms of their DTAA when their Comprehensive Economic Cooperation Agreement (CECA) is reviewed on March 31.

“We have received representations from several financial service companies who have said that the definition of a shell company as laid out in the DTAA is proving to be restrictive. Many of these companies have special purpose vehicles (SPVs) which are not covered by the twin conditions for getting capital gains tax exemption in the DTAA,” a Singapore official said.

The India-Singapore DTAA lays down two eligibility conditions for capital gains tax exemption. These are listing on a recognised stock exchange and a total annual expenditure on operations in the residence state equal to or more than $20,000 or Rs 50,00,000 in the 24-month period from the date of the gains. “We want to make the DTAA more ambitious,” the official said. The Mauritius treaty doesn't include such conditions, leading the Indian tax authorities to question the bona fides of some Mauritius-resident holding companies, which they believe act as cloaks for 'round-tripping' Indian companies.

Singapore officials said the review meeting would also discuss measures to make Singapore an “investment hub” for India. “We want to be the hub for India not just in the financial services sector but also for both foreign direct investment and foreign institutional investment,” officials said.

The CECA went into effect on July 1, 2005, and has broadly similar terms to the CECPA between India and Mauritius.

After Singapore's CECPA was signed, Mauritius began to have concerns that their DTAA might be under threat, but Indian Foreign Secretary, Shyam Saram, was more or less reassuring on the subject on a trip to Mauritius in September. “There is space for everyone. The treaty with Mauritius has benefits that are not included in the one with Singapore," he said. "You have offshore management firms, which know the Indian market very well and which offer a high-level service to operators investing in India. You don’t have to worry…”

Indeed, Mauritius signed its own CECPA with India in September, and there have already been five rounds of implementing discussions since then. Rajesh Jeetah, Mauritian Minister of Industry, told a meeting of the India/Mauritius Joint Business Council that the CECPA would 'bring a new dynamism' to cooperation between the two countries.

Singapore's Education Minister Tharman Shanmugaratnam, who is also deputy chairman of the Monetary Authority of Singapore, said last year that Singapore aims to be the market intelligence hub on India, and that global financial institutions are increasingly basing India-related work in Singapore. JP Morgan and Citigroup, for instance, cover India from Singapore using Indian expatriate specialists, while Deutsche Bank and Aberdeen manage their fund investments in India from Singapore.

'MAS will develop this segment of India intelligence proactively, as part of our effort to develop Singapore as a funding centre for Indian companies,' Mr Tharman said. But while there is rising awareness that opportunities abound in India, there is still a 'huge knowledge gap', he said.

Although Singapore has been given a boost by the signing of the CECA, Mauritius has historically been the leading external conduit jurisdiction for Indian FDI, and retains some tax advantages over Singapore.

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