Several Mauritius-based foreign portfolio investors are relooking at their investment company structures, after a recent order by a quasi-judicial body denying benefits of grandfathering provisions under the India-Mauritius Double Tax Avoidance Agreement treaty to private equity firm Tiger Global.
Some of them are making sure that investment decisions are made in Mauritius. Entities that normally hire common directors on boards are also now replacing them. In many cased, tax officials have pointed out that companies rope in some professionals who are directors of hundreds of such firms in Mauritius.
Even some of the smallest things like book keeping or holding quarterly meetings have started In Mauritius and Singapore, say people in the know.
The Authority of Advance Ruling (AAR) recently refused to grant relief to Tiger Global, a US-based investor, over the taxability of its Rs 14,500-crore sale of Flipkart stake to Walmart.
Three Mauritius-based investment arms of Tiger Global had approached the AAR after the Income Tax Department rejected their application seeking benefits under the tax treaty.
The AAR held that the Mauritius companies were only “see-through entities” created to avail of the benefits under the tax treaty and indicated that the real beneficiary was the US firm.
The observations of the AAR on Tiger Global have now raised concerns with other foreign investors who have their holding companies in other jurisdictions, as they fear losing the grandfathering benefit, especially under the Mauritius and Singapore treaties, say tax experts.
The grandfathering benefit refers to an assurance given to investors by India when it amended the Singapore and Mauritius tax treaties. As per that, investment made prior to 2016 would be treated under the old tax treaty — or the investment would be grandfathered — wherein no tax was levied on capital gains.
“Many investors would have strengthened the substance requirements after April 2017 when GAAR (General Anti Avoidance Rule) was introduced. Such investors could now begin to review the operational aspects of their holding company structures such as bank account authorisation, composition and authority of the board of directors, location of head and brain, etc.” Deloitte India partner Rajesh H Gandhi said.
The AAR ruling had questioned the substance — that whether the actual decisions were made at the Mauritius firms or whether they were merely passthrough entities.
While the AAR ruling is binding only on the Tiger Global entities, the same rationale could be used by the tax department to challenge other investments covered under the grandfathering benefit, fear investors.
Source: indiatimes.com
