Mauritius, India agree to 'limitation of benefit' clause: In treaty or policy?

Mauritius has reportedly agreed to amend its tax treaty with India to check treaty shopping. It would bring in a limitation of benefit clause, which would be used to distinguish between genuine investors and shell companies that merely want to take advantage of the tax benefits under the present Indo-Mauritian treaty. The distinction would be linked to spending: a company that spends more than a certain sum of money every year for its operations in Mauritius would not be treated as ashell company. A similar rule exists in India’s tax treaty with Singapore. Mauritius’ aim seems to be to find a shield from the promised scrutiny under GAAR, India’s general anti-avoidance rules that many investors fear. This throws up many questions about taxation of investors.

Does India need specific countries to act as zero-tax entry routes for foreign direct investment to come to India? If the goal of attracting FDI is paramount, why not simply exempt all foreign investment from the rigours of taxation, regardless of the country it comes from? Further, to the extent the distinction between shell companies and genuine investors is really limited to distinguishing genuine foreign investment from round-tripping of Indian investment, is not transparency on beneficial ownership a far more effective deterrent than floor spending in the treaty country? An OECD-led, G20-backed global tax transparency campaign is underway. Only when all jurisdictions take part can beneficial ownership be established without any obfuscation.

The current tax haven system is based on countries having high-tax regimes with complex rules that make it difficult for would-be investors to compare post-tax returns across potential investee countries. The point is to move towards low-tax, simple tax regimes that make tax havens redundant.