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Mauritius to finalise tax treaty by Dec
November, 17th 2006

After tightening of tax residency certificate norms, Mauritius may put in place more such procedures by December to address Indias concerns on the alleged misuse of the double-taxation avoidance agreement (DTAA). The joint working group set up to iron out the contentious elements from the treaty is expected to finalise its recommendations by this year end, sources said.

Simultaneously, as the pressure grows on Mauritius, its local industry has now joined forces with its government to lobby for the continuation of the DTAA. The Association of Offshore Management Companies of Mauritius representatives said on Thursday that the country has already implemented procedures which have eliminated the eventuality of round-tripping.

The association, which includes companies like HSBC Bank (Mauritius) and International Financial Services, has claimed that Mauritius has developed an excellent platform for the flow of investment into India and other Asian countries. The association representatives told ET that Indian domestic laws had relevant exchange control regulations like Fema to prevent any round-tripping.

The UPA government has made the revision of the India-Mauritius DTAA as one of the cornerstone of its policies for the capital markets. India has pointed out that Mauritius has recently allowed the reworking of its tax avoidance treaty with China, after Beijing raised objections, similar to the ones raised by New Delhi. But despite the noises from New Delhi, Mauritius is not keen for a review of the treaty. Instead it has tightened the rules for claiming residency status in the island. A joint group has been set up to chalk out the future course of bilateral investment issues.

For, New Delhi, which has put the limitation of benefit clause in its DTAAs with some other countries like Singapore, has been facing heat from them. In fact, Singapore also had demanded Mauritius-like benefits from India in the DTAA, but since New Delhi is already in the process of reworking such agreements with tax havens like Cyprus, it turned it down.

Indias concerns about the treaty stems from alleged round-tripping or misuse of the treaty by companies which route their investments into the Indian securities market to get exemption from capital gains tax. Companies indulging in this set up outfits which function as letter-box companies in Mauritius to avail of these benefits.

Sources said while the treaty may not be reviewed completely, some new provisions to limit the benefits available under the treaty may be introduced. The new proposals on the lines of Indo-US DTAA and India-Singapore DTAA could include a rule that only companies listed on a recognised stock exchange would be eligible for exemption from capital gains.

Besides, a clause entailing expenditure on operations in the residence state that is Mauritius for at least two years prior to the date on which a capital gain arises as a criterion for tax residency certificate can be brought in.

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