Global Finance Official Website

How The Latest Mauritius Budget Changes Taxation For FPIs Into India

Historically, Mauritius has always been a key jurisdiction in the context of inbound investment in India whether from the perspective of Foreign Portfolio Investors or Foreign Direct Investment. This has mainly been on account of the following reasons:

1. Favorable India-Mauritius Tax Treaty

The erstwhile India-Mauritius tax treaty (prior to April 1, 2017) provided a complete exemption from Indian tax for capital gains earned by Mauritius residents from India. Even under the revised India-Mauritius tax treaty, there are tax benefits in the form of grandfathering of investments in shares made prior to April 1, 2017, 50 percent of tax payable in India during the period April 1, 2017 to March 31, 2019 and continuing exemption from Indian tax for investments in debentures/bonds/derivatives, etc. Further, interest income from India to a Mauritius resident is subject to withholding tax of only 7.5 percent, which is the most favorable as compared to other popular jurisdictions. This, coupled with the fact that Mauritius has kept the tax treaty with India outside the purview of the Multilateral Instrument signed under the Organisation of Economic Cooperation and Development’s Base Erosion and Profit Shifting project, has given the India-Mauritius tax treaty an edge over other popular jurisdictions.

2. Favorable Domestic Regulations

Apart from the tax treaty, Mauritius had very favorable domestic tax regulations which provided for hardly any taxation in Mauritius. This is explained in detail later.

The Regime Of Global Business Companies

Traditionally, Global Business Companies are companies incorporated in Mauritius with a focus on undertaking global business activities. Considering the special focus of GBCs, they are approved and regulated by the Financial Services Commission of Mauritius. Broadly, the features of two categories of Global Business Licenses issued by FSC to GBCs are as under:

Categories Of Global Business Licenses In Mauritius

Particulars GBL-1 Holder GBL-2 Holder
Permissible activities Permitted to carry out any legal business activity. The scope of permitted activities is restrictive. For instance, GBL-2 holders are not permitted to carry out businesses such as banking, financial services, business of holding or managing or dealing with a collective investment fund or scheme as a professional functionary, providing of registered office facilities, nominee services, directorship services, secretarial services or other services for corporations; or providing trusteeship services by way of business.
Tax residency Treated as tax residents of Mauritius, eligible to avail benefits of Mauritius’ network of tax treaties. Not treated as tax residents of Mauritius. Not eligible to avail benefits of Mauritius’ network of tax treaties.
Income taxes payable in Mauritius 15% headline corporate tax rate. Eligible to obtain deemed tax credit for the higher of: actual foreign tax incurred on income or; a deemed foreign tax credit equivalent to 80% of the Mauritius tax payable. Hence, the effective tax rate is broadly between 0-3%. Not liable to tax in Mauritius.

Such an incentivised tax system has brought a lot of focus on the role played by Mauritius in the context of transparency in the global economy and also use of Mauritius for purposes of tax treaty shopping and tax avoidance. In the past, certain concerns were raised by the European Union and OECD about the tax regime in Mauritius. As per the International Monetary Fund report issued in December 2017, the EU has classified Mauritius’ Deemed Foreign Tax Credit to the Global Business sector as a potentially harmful tax practice and notified Mauritius that it would assess the regime as harmful unless the beneficiaries are systematically taxed like other companies.

Also, the OECD’s Forum on Harmful Tax Practices has found the regime for the less transparent Category 2 Global Business Companies potentially harmful.

Mauritius’ Budget 2018-19 And Changes Proposed To Taxation Of GBCs Holding GBL

The Prime Minister of Mauritius announced the Budget of 2018-19 on June 14, 2018, in which significant proposals have been made to simplify the tax regime in Mauritius and boost its image as a transparent and compliant International Financial Centre. Amongst others, the proposals which have caught India’s attention are changes pertaining to the tax regime for GBCs. The key changes proposed by Budget 2018-19 to such GBCs are as under:

  • With an intention to streamline tax structure for GBL holders in Mauritius with normal resident companies, it is proposed to do away with deemed FTC of 80 percent available to GBL-1 holders.
  • Instead, a new regime of partial exemption is proposed to be introduced applicable to all companies in Mauritius (other than banks). In this regime, 80 percent of the specified income would be exempt from tax in Mauritius subject to satisfaction of the FSC’s pre-defined substantial activities requirement. The partial exemption regime would cover income such as foreign sources dividend and profit attributable to a foreign Permanent Establishment, interest and royalties, and income from the provision of specified financial services. The earlier deemed tax credit mechanism would continue to apply for cases not eligible for partial exemption.
  • It appears that foreign capital gains may continue to be exempt from tax in Mauritius.
  • It is proposed that FSC will discontinue issue of GBL-2 licences from January 2019. Existing GBL-2 companies will be grandfathered. Accordingly, the tax regime for GBL-2 will be accordingly reviewed.

Impact On FPI Investments In India

Apparently, since foreign earned capital gains may continue to be exempt from tax in Mauritius, there should not be any impact on Mauritius companies investing into India under the FPI (or FDI route) on this account.

The major change would be in the computation of tax on the dividends or interest income earned by Mauritius companies from Indian investments.

Since the unilateral tax credit under Mauritius law is proposed to be done away with, the possibility of obtaining tax credit under India-Mauritius tax treaty would have to be explored, subject to permissibility under Mauritius tax law.

For instance, can credit be obtained by an FPI for dividend distribution tax paid by Indian companies on the distribution of dividend (which is higher than the headline corporate tax rate of 15 percent)? While in the deemed credit system this may have been possible (resulting in NIL tax), the answer under the partial exemption may be ‘no’ for FPI entities since the tax treaty requires the Mauritius resident to own at least 10 percent shares of the Indian company (which is not permitted under FPI regulations).

Accordingly, there could be a potential 3 percent tax liability on Mauritius FPIs earning dividend income from Indian shares.

In case of interest income from FPIs’ Indian debt investments (which generally attracts withholding tax of 5/7.5 percent in India), the partial exemption regime along with a tax treaty benefit could, in fact, result in a lower tax payment as compared to the earlier tax of 3 percent under the deemed tax credit regime. This is explained below:

Comparing The Old And New Tax Regimes

Particulars Deemed Tax Credit Regime (In %) Partial Exemption Regime (In %)
Interest income 100 100
Withholding tax in India 5/7.5 5/7.5
Headline tax in Mauritius 15 15
Tax base 100 20 (80% exempt)
Gross tax payable in Mauritius 15 3
Tax credit 12 (deemed 80%) 1/1.5 (under tax treaty, proportionate to income offered to tax in Mauritius = 5/7.5*20%)
Tax liability 3 2/1.5

Whether the taxpayer has an option to apply the deemed tax credit system or partial exemption system, as may be more beneficial to its case, needs to be analysed.

Other Financial Sector Reforms

In addition to those mentioned, other proposals have also been introduced for a new framework to govern and improve the oversight of management companies. Further, a new harmonised fiscal regime for domestic companies and GBCs is proposed to be introduced. The objective of the government is to enhance the competitiveness of Mauritius as an International Financial Centre. Accordingly, the FSC, in collaboration with the OECD, will host a Regional Centre for capacity building and best practices in its combat against financial malpractices.

The proposals introduced by the Mauritius Government will impact taxation of Mauritius FPIs investing into India. However, the fact that Mauritius will be working with OECD to introduce and implement best practices, appears to be a step in the right direction to establish Mauritius’ global credentials as a tax and investment friendly jurisdiction, while maintaining transparency.

Source: Bloomberg Quint