Direct action

Mauritius is geared up for the challenges presented by the Direct Tax Code with regard to investment into India. By Craig Fulton and Nicolas Richard



A draft bill known as the Direct Tax Code (DTC) has been sent to the Indian Parliament for consideration. It is anticipated that it will be enacted over the coming year and become effective on 1 April 2012.

In its current form the DTC could have far-reaching consequences for foreign investors in India. Previous drafts of the DTC contained double taxation treaty ­override provisions – ie in case of conflict between a double taxation treaty and the provisions of the DTC, the one that is later in time would prevail. However, this is no longer the case in the latest draft, which now provides that, where there are different potential tax consequences payable by a ­taxpayer under a domestic Indian tax law and a tax treaty, the law or tax treaty that is more beneficial to the taxpayer should apply.

While this is undoubtedly good news from the perspective of those who benefit from the Double Taxation Avoidance Agreement between India and Mauritius (the India DTAA), it should however be noted that the revised draft contains what are known as General Anti-Avoidance Rules (GAAR). From an investors perspective a tax treaty would not have preferential status over the Indian domestic law when, inter alia, the GAAR provisions are invoked.

The GAAR provisions are discretionary, have far-reaching implications and give the Indian tax authorities very broad powers. It is, however, very important to note that the latest discussion paper clarifies that the GAAR provisions do not envisage that every arrangement for tax mitigation would be liable to be considered as an impermissible avoidance arrangement.

The GAAR provisions would only be invoked if, in addition to obtaining a tax benefit for the assessee, an arrangement is also covered by one of the following four conditions: it is not at arm’s length; it ­represents misuse or abuse of the ­provisions of the DTC; it lacks commercial substance; and it is entered or carried on in a manner not normally employed for bona fide ­business purposes.

To be announced

Recommendations have been made by interested parties to the effect that the GAAR provisions should only apply prospectively and not cover the previous arrangements, but the latest discussion paper remains silent on this point. It is understood that, during the course of next year, regulations will be issued that will give greater guidance as to how these GAAR provisions will be applied.

The DTC has caused some concern in Mauritius given the recent attempts by the Indian tax authorities to tax foreign investors in India (for example in the case of Vodafone). While we will have a clearer idea of how to deal with this challenge when the regulations become available, at this stage there is a focus on what can be done to add further substance to the Mauritius role to reinforce the fact that Mauritius entities are effectively managed and controlled from Mauritius. By doing this it is felt that ­Mauritius entities will be less subject to attack under the GAAR provisions.

Also, as there are currently no ­’grandfathering’ provisions in the latest draft of the DTC and so certain existing structures may need to be reviewed.

It will be advisable for investors seeking to take advantage of the India DTAA to have an even more substantive presence in ­Mauritius, and this would also be the case for existing Mauritian entities if the final version of the DTC applies retrospectively.

Making the list

From our discussions with several Indian tax advisers, we understand that, in addition to adding more substance and independence at the level of Mauritius investment holding companies, potential courses of action would include, inter alia, listing the shares of the Mauritius entity on the Stock Exchange of Mauritius (SEM). The good news in that regard is that the SEM has reviewed its listing rules recently to facilitate the more efficient listing of funds (global schemes) formed in Mauritius. The SEM is a well-regulated exchange that has gained recognition through its accreditation to ­various international bodies, including the World Federation of Exchanges, the South Asian Federation of Exchanges, the African Securities Exchanges Association and the Committee of SADC Stock Exchanges.

Another potential solution for investors to explore would be to undertake the actual pooling of funds in Mauritius by forming the proper fund or joint venture vehicle in ­Mauritius instead of, for example, forming a Cayman Islands or Luxembourg entity as their pooling vehicle, which then feeds into a Mauritius company. The substantive test can also be achieved by setting up ­coinvestment vehicles in Mauritius.

The manner in which business is done in Mauritius, then, is bound to evolve and is likely to become more sophisticated. ­Mauritius, a developed and established international financial centre with ­qualified and experienced service providers, is well-placed to meet this challenge.

Craig Fulton is head of the Mauritius office and Nicolas Richard is an associate at Conyers Dill & Pearman