Discuss how the amendment to the India-Mauritius treaty reflects efforts to address and close well-known loopholes. (GS-2: International Relations) [10M, 150 words]

Introduction:

• India and Mauritius recently signed a protocol in Port Louis, amending their Double Taxation Avoidance Agreement (DTAA).
• The amended pact incorporates the Principal Purpose Test (PPT), aligning with global efforts against treaty abuse under the Base Erosion and Profit Shifting (BEPS) framework.
• The PPT ensures that tax benefits under the treaty are denied if obtaining those benefits was the main purpose of any transaction or arrangement.

Body:

• Tax treaties play a crucial role in fostering cross-border investment by defining how income earned in one country is taxed by residents of another.
• The BEPS project aims to prevent tax avoidance through the use of low-tax jurisdictions. The OECD, responsible for redesigning international tax laws, established 15 action points, one of which is the Multilateral Instrument (MLI). This instrument allows countries to modify tax treaties quickly to implement these best practices.
• A significant enhancement through the MLI is the inclusion of provisions to prevent treaty abuse and the revision of treaty preambles. This aims to prevent non-taxation or reduced taxation resulting from tax evasion, including treaty-shopping and anti-abuse regulations that empower tax administrations to withhold treaty benefits in certain cases.
• Treaty benefits, like reduced withholding tax rates, may be denied if it can be reasonably concluded that obtaining such benefits was a primary aim of the transaction.
• The amendment empowers tax authorities to scrutinize the intent behind financial flows, particularly from Mauritius, which is often used as a conduit for investments by taxpayers from different jurisdictions.

Conclusion:

• The amendments to the treaty enable authorities to look beyond mere residency certificates and assess the principal purpose of transactions or arrangements.
• Indian tax law also includes a General Anti-Avoidance Rule (GAAR) introduced in 2017 to ensure compliance with the spirit of the law.
• The Subject to Tax Rule (STTR) ensures a top-up tax on low-taxed intra-group transactions, subject to corporate tax rates below the minimum threshold of 9%.