How taxes are evaded - The Mauritius story

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Mauritius is now out of the FATF grey list, which may materially impact FDI into India.

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How taxes are evaded - The Mauritius story

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  • The story: The Financial Action Task Force (FATF) removed Mauritius from its ‘grey list’ of countries which may indirectly lead to higher investment to India from the island nation.
  • Mauritius preferred for FDI: The India-Mauritius double tax avoidance agreement (DTAA) is a tax treaty signed between the two, enabling taxpayers to avoid paying double taxes on their income earned from the source country as well as the residence country. This in turn allowed foreign investors to avoid capital gains tax on investments.
  1. Loose regulations in Mauritius made it easy for companies to round-trip money into India through "name-plate entities". But with the arrival of the General Anti Avoidance Rules (GAAR) in 2017 and changing of the DTAA which removed the tax benefits, the Mauritius route became less attractive.
  2. In 2012, various FPIs from Mauritius were the largest holders of Indian equity and debt instruments but Mauritius has slipped to second position in the last five years. Foreign direct investors are also increasingly preferring the Singapore route where the regulations are tighter.
  3. After the US, Mauritius is the second largest route for inflow from foreign portfolio investors.
  • Mauritius out of the grey list: Removal of Mauritius from grey listing will help regain its status as a financial centre. That in turn will enable Indian non-banking and other financial services companies to receive FDI from funds and vehicles incorporated by international investors in Mauritius. There may be less scrutiny by custodian banks on the 'beneficial ownership’ (BO) of Mauritius vehicles coming in as FPI and FDI. (Many offshore funds continue to prefer Mauritius which is comparatively inexpensive and serves as a gateway for investments in African countries)
  • FATF: The Financial Action Task Force is a global terror financing watchdog headquartered in Paris, set up in 1989 by the G7 countries. It is an international watchdog on issues of money laundering and financing of terrorism, empowered to curtail financing of UN-designated terrorist groups. It can limit the concerned countries from sourcing financial flows internationally and thereby constraining them economically. India became a full member in 2010.
  1. Black List - Countries known as Non-Cooperative Countries or Territories (NCCTs) are put in the blacklist. These countries support terror funding and money laundering activities.
  2. Grey List - Countries that are considered safe haven for supporting terror funding and money laundering are put in the FATF grey list. This inclusion serves as a warning to the country that it may enter the blacklist.
  • Mauritius in FATF’s list: It was put on the list in February 2020 for its weak system to counter money laundering and terror financing. It has been one of the largest contributors of FDI to India but due to this restriction RBI had last year directed that financial firms should not be set up with funds from Mauritius. It has now strengthened its anti-money laundering and terror financing process and has addressed related technical deficiencies to meet the commitments in its FATF action plan. Hence, the FATF informed that Mauritius is no longer subject to its increased monitoring process.
  • EXAM QUESTIONS: (1) Explain why Mauritius was a preferred source for FDI into India, for years. (2) What is the FATF's stance on Mauritius? Analyse. (3) What is the double tax avoidance treaty? Whom does it help?
Read more on - Polity | Economy | Schemes | S&T | Environment

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PT's IAS Academy: How taxes are evaded - The Mauritius story
How taxes are evaded - The Mauritius story
Mauritius is now out of the FATF grey list, which may materially impact FDI into India.
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PT's IAS Academy
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