NEW DELHI: India and Mauritius have signed a protocol to amend the double taxation avoidance agreement (DTAA) by adding principle purpose test (PPT).
PPT is a provision in international tax treaties designed to prevent abuse and tax avoidance by denying pact benefits if one of the principal purposes of a transaction was to take advantage of those benefits, rather than for genuine commercial reasons.
The protocol added a new article, “Article 27B Entitlement to Benefits,” to ensure that treaty benefits are granted only for transactions with a bona fide purpose. The amendment, signed on March 7, has now been made public.
As per Lokesh Shah, Partner, INDUSLAW, introduction of PPT is a measure implemented to align the tax treaty with base erosion and profit shifting (BEPS) Action Plan 6 initiated by the OECD and G20 Countries to combat tax evasion.
“This would mean taxpayer’s resident in Mauritius can no longer simply rely on a tax residency certificate (TRC) issued by Mauritius Revenue authority to claim treaty benefits,” Shah said. The Central Board of Direct Taxes (CBDT) Circular 789 had clarified that TRC by Mauritian authorities will constitute sufficient evidence of residence to claim benefits of tax treaty. Later, the Supreme Court of India in the case of Azadi Bachao Andolan upheld the validity of Circular No. 789.
With PPT test now introduced in the India-Mauritius tax treaty, tax authorities in India are likely to look beyond TRC and will have the ability to deny the benefit of India-Mauritius tax treaty if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining the treaty benefits was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly such tax benefit.
“The tax authorities will have the ability to take a closer look at the structure, and assess the intent and commercial rationale, before granting treaty benefits. Existing structures / investments from Mauritius will now need to pass through the PPT test,” Shah added.
Meanwhile, Punit Shah, Partner, Dhruva Advisors, said “The protocol amending India Mauritius tax treaty provides that even if one of the main purposes of setting up structure in Mauritius is to take benefit of tax exemptions, such benefit can be denied. Hence, the investors would need to demonstrate commercial justification and rationale for setting up in Mauritius."