Mauritius and India economic relations: Navigating changing tax treaties and foreign investment dynamics

Mauritius and India have had close economic ties for a long time, supported by a favorable tax framework and a beneficial bilateral tax treaty. However, in recent years, the global tax landscape has undergone significant upheavals, questioning the delicate balance between attracting foreign investments and combating tax evasion. StraFin gives you an insight into the latest changes unfolding between these two longstanding partners and the impact of such measures on foreign investment.

A longstanding economic partnership

With its attractive tax system and its status as a tax haven, Mauritius has been a favorite destination for Indian investors for several decades. The 1982 bilateral tax treaty played a significant role in facilitating investment flows by exempting profits of Mauritian companies from Indian income tax and reducing withholding taxes on dividends and interest.

This favorable tax framework has allowed Indian companies to channel their investments through Mauritius, benefiting from lower tax rates and greater freedom for the movement of capital. This practice, known as “treaty shopping,” has helped boost Mauritius’s economic growth and diversify Indian investments.

Emerging challenges and the need for reforms

However, the increasing use of Mauritius for tax optimization has also raised growing concerns among Indian authorities about significant revenue losses and the potential for Indian companies to artificially reduce their tax liabilities.

In response, the Organization for Economic Cooperation and Development (OECD) launched the Base Erosion and Profit Shifting (BEPS) program in 2013. The program’s objective was to combat international tax evasion by developing standards and recommended practices for countries.

As part of the BEPS program, India and Mauritius agreed to amend their bilateral tax treaty in 2017. These amendments aimed to limit the opportunities for abusive tax optimization and enhance the transparency of investment flows.

Understanding the implications of a new tax landscape

The recent tax reforms have significantly impacted economic relations between Mauritius and India. Indian companies are now faced with a more complex and transparent tax environment, ensuring compliance with new rules and justifying the economic substance of their investments.

As a jurisdiction reliant on foreign investments, Mauritius also faces the challenge of maintaining its attractiveness to investors while adhering to international tax standards. Therefore, diversifying the economy and focusing on the creation of real value could be key strategies for sustainable development.

Conclusion

The evolution of tax relations between Mauritius and India illustrates the challenges and opportunities associated with globalization and the need for a more equitable and transparent international tax system. Ongoing collaboration between the two countries and the introduction of consistent international tax standards will be crucial for navigating the tax optimization changes and promoting sustainable and beneficial investments for both economies.

However, it is important to note that the future of economic relations between Mauritius and India does not solely rest on tax matters. Other factors, such as trade cooperation, investment, and development, will also play a crucial role in building a mutually beneficial and lasting partnership.

Article source: https://indianexpress.com/article/opinion/columns/what-india-mauritius-treaty-amendments-mean-for-foreign-investors-9285167/