Will BEPS affect India-Mauritius treaty renegotiation?
OECD today released final reports on 15 Action Plans under BEPS Project. The report on Action 6 - Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, states that countries have agreed to include anti-abuse provisions in their tax treaties, including a minimum standard to counter treaty shopping. India is a member in the BEPS project.
OECD states that “Taxpayers engaged in treaty shopping and other treaty abuse strategies undermine tax sovereignty by claiming treaty benefits in situations where these benefits were not intended to be granted, thereby depriving countries of tax revenues”.
The report also includes following specific strategies to counter “letterbox companies” -
- A clear statement in tax treaties that States which enter into a tax treaty intend to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements;
- Introduction of limitation-on-benefits (LOB) rule based on the legal nature, ownership in, and general activities of the entity, seek to ensure that there is a sufficient link between the entity and its State of residence; and
- A more general anti-abuse rule based on the “principal purposes of transactions” or arrangements (PPT test).
As regards the implementation of this rule, following (rather long) paragraph from the report is interesting –
“23. Countries commit to adopt in their bilateral treaties measures that implement the minimum standard described in the preceding paragraph if requested to do so by other countries that have made the same commitment and that will request the inclusion of these measures. Whilst the way in which this minimum standard will be implemented in each bilateral treaty will need to be agreed to between the Contracting States, this commitment applies to existing and future treaties. Since the conclusion of a new treaty and the modification of an existing treaty depend on the overall balance of the provisions of a treaty, however, this commitment should not be interpreted as a commitment to conclude new treaties or amend existing treaties within a specified period of time. Also, if a country is not itself concerned by the effect of treaty-shopping on its own taxation rights as a State of source, it will not be obliged to apply provisions such as the LOB or the PPT as long as it agrees to include in a treaty provisions that its treaty partner will be able to use for that purpose. Whilst the minimum standard will be included in the multilateral instrument that will be negotiated pursuant to Action 15 of the BEPS Action Plan, which will provide an effective way to implement it swiftly, this may not be sufficient to ensure its implementation since participation in the multilateral instrument is not mandatory and two countries that are parties to an existing treaty may have different preferences as to how the minimum standard should be met; monitoring of the implementation of the minimum standard will therefore be necessary.”
This shows that Government have been given a flexibility even on the anti-treaty abuse clauses as also the timeline. If it is demonstrated that considering different preferences, minimum standard has been met, it appears that Governments may not be bound to introduce all 3 pronged measures suggested in the report.
Taxsutra in July this year reported that India & Mauritius have reached a "tentative deal" on tax treaty & LOB clauses are likely.
This might also be relevant in ongoing India-Mauritius treaty negotiation wherein it is likely that LOB clause may be introduced. In other words, even post-BEPS, a scenario could be possible that capital gains exemption under India-Mauritius treaty be retained (albeit with riders).