IT department reviews Mauritius FPI for suspected abuse of treaties and tests for “matter”
Recently, at least six FPIs were submitted through the Income Tax (IT) department to submit an application form submitted to the Mauritius Taxation Agency (MRA) for obtaining a Tax Residence Certificate (TRC). The statements issued in the application form will reflect whether the FPI has sufficient “material” offices, employees, assets, etc.
In the absence of substance, the tax department may question treaty benefits, such as zero tax on stock gains from stocks purchased before April 2017, and profits from stock derivatives trading on Indian exchanges.
The TRC enables Mauritius investors to benefit from double tax relief under various treaties signed by Mauritius with other countries.
Tax doctors who encountered such cases told ET that this is the first time the IT department has requested such information.
“Recently, if reviewed under Section 142(1) of the IT Act, the department told some of Mauritius’ FPIs to file their TRC applications. About 5 years ago, FPIS also had to file a similar form separately, namely the Financial Services Commission (FSC) (FSC) (Markets’ regulator in Mauritius). These other documents are unclear under any circumstances. It is not clear whether the benefits of the treaty can be questioned based on the statements in the TRC application. At least one person is a resident of Mauritius; whether the applicant’s constitution will resolve this dispute through arbitration in Mauritius; if the applicant holds at least $100,000 in assets in Mauritius (excluding cash held in a bank account or stocks of another company with a global business license in Mauritius; if the annual expenditure is controlled and managed with similar companies in Mauritius.
“It must be recognized that MRA has verified the economic substance of the FPI before the release of the TRC. Therefore, it is reasonable to rely on TRC as a proof. I hope the authorities can restart their attitude, rather than restarting trc, and not rebooting this details, rather than introducing this in detail here, and this startup is so for foreign investors.”
Although the department has not yet invoked any ruling on the general anti-avoidance rule (GAAR) or any ruling for deprivation of treaty benefits based on information in the TRC application, the outcome of the court battle between Tiger Global, Offshore Investor and the tax department (about the effectiveness of the TRC). According to Ashish Karundia, founder of CA company Ashish Karundia & Associates, “It is relatively easier to cite the main purpose test (PPT) once notified than to apply GAAR because if one of the main goals of the arrangement can also trigger the PPT, it can be triggered.
Unlike GAAR, PPT (which is part of a treaty application) does not require any currency threshold or prior approval from senior authorities or ratification teams. Regardless of how the Supreme Court stipulates Tiger Global regulations, tax authorities can still be held up by the PPT based on the fact that an entity lacks commercial substances and is inserted for tax avoidance purposes only. ”
