Tax treaty: All eyes on Singapore

Mauritius and Singapore are linked by the bond of competition when it comes to their status of favourable investment routes into India. Has Mauritius lost the upper hand to its opponent with the revised tax treaty?

Mauritius chose to demarcate itself in a bold move on the tax front early this month by renegotiating its Double Taxation Avoidance Agreement (DTAA) with the Indian government, following a ten-year tug of war. The new treaty, which is perceived by a large majority of local offshore operators to be disastrous for the country as an offshore jurisdiction, holds broader geopolitical implications above airs of a mere deal between India – one of the most prominent economic powerhouses of the hour – and ‘Little India’, as Mauritius is fondly called.

Now that the tiebreaker has ended, it is time for the renegotiation of the DTAA between India and Singapore – one of Mauritius’ heavyweight competitors for foreign investment via treaty route in India. Singapore had insisted on conditions at the moment of entering into this agreement, stipulating that its treaty could be renegotiated only when this would be a done deal with Mauritius. All eyes in the global business arena are anxiously eager to see how this will unfurl.

Mauritian management companies are particularly wary about this turn of events fearing that Singapore might do all in its power to delay treaty negotiations and maintain, in this way, its newly found advantage over Mauritius for as long as possible. While Indian Finance Minister, Arun Jaitley, has recently stated that there will not be a timeline applicable to renegotiations between Singapore and India, citing Mauritius and the ten years spent trying to reach an agreement as example.

Mauritius is not shielded from this potential turn of events, agrees Sujit Ghosh, partner and tax litigator of Advaita Legal, an independent law firm having best friend relationship with KPMG in India. “Singapore will try as hard as possible to get an advantage over Mauritius since they now have precedence and seen the Protocol as it was enforced with Mauritius,” he stated. Singapore can thus make its own choices for its new agreement while there is no condition that these must be concluded before April 1, 2017, the date when the new Indo-Mauritian treaty comes into the picture. “These are sovereign functions. It all depends on convenience, exigencies, political will and economic realities. Putting a timeline on it is difficult but I can surely see Singapore rallying really, really hard so that their competitive advantage is not lost out,” Sujit Ghosh observed.

Mirror treaty for Singapore?

Meanwhile, research-based Indian law firm Nishith Desai Associates has brought forth a few suggestions pertaining to the revision of the Indo-Singaporean treaty owing to its importance for the Indian economy. When Singapore and India were ready to sign theComprehensive Economic Cooperation Agreement (CECA) in 2005, states Vivek Kathpalia, Partner of Nishith Desai Associates, they too amended their tax treaty to bring it on par with what India and Mauritius had, albeit with higher standard of substance to be met in Singapore.

“This has led to Singapore playing a very critical role in the growth of investments into India. Singapore is indeed a “natural hub” for India and can only benefit with India’s projected growth trajectory. In fact, Singapore emerged as the largest investor of FDI (foreign direct investment) in India in the recent past. But some anomalies have crept into the India-Singapore tax treaty which need to be dealt with urgently,” he pointed out.

In his opinion, the last thing the two countries want is a loss in momentum in their burgeoning economic relationship. Investors want clarity and they seem to have got that as far as Mauritius is concerned, Vivek Kathpalia highlighted. For him, the lack of a similar grandfathering provision in the Singapore treaty means that no such protection may be available to investments made under the India-Singapore DTAA for investments in shares prior to March 31, 2017. “Hence the urgent need for clarity. What is quite clear is that the intention of India and Singapore was that the two treaties should provide almost equal treatment to investors,” Vivek Kathpalia voiced out.

He thus suggests that keeping in mind the very critical role Singapore is playing in the development of India, the tax treaty should (like the India-Mauritius pact) have clear grandfathering provisions with respect to all investments made by residents of Singapore in the shares of Indian companies till March 31, 2017, and after that, till March 31, 2019, a rate of tax not exceeding 50 per cent of the applicable capital gains tax in India on gains made prior to March 31, 2019, subject to meeting the limitation of benefits conditions in the Singapore-India treaty. This would then be a mirror to the treaty with Mauritius.

Mauritius tax residents can now lend money to Indian residents and be subject to a lower withholding tax rate of 7.5 per cent in India. The rate applicable to similar debt investments from Singapore is currently 15 per cent (with a reduced rate of 10 per cent for banks). Singapore is a leading financial centre in the world and will undoubtedly be a centre for debt investments into India as well. “Therefore a similar withholding tax rate of 7.5 per cent should be negotiated into the treaty. This will encourage the growth of the debt markets in both India and Singapore. Singapore should also look at its domestic law provisions to ensure that investors investing in debt from Singapore are not put to a greater burden than those investing from Mauritius,” added Vivek Kathpalia.

Offshore banks threatened?

Investors can however take consolation in the fact that treaty renegotiation for all jurisdictions are but a matter of time. Mauritius might certainly be feeling the pinch, having been at the forefront of this series of events, but that does not mean that it would not have happened sooner or later, stated Sujit Ghosh. The whole tax treaty system will evolve and change, according to him. He however brings to light certain risks that the Segment B banks in Mauritius might be facing owing to the revision of the tax agreement with India. Several banks, he comments, will be required to relook at their investment routes and instead of opt for more favourable jurisdictions like the Netherlands for example, said Sujit Ghosh. “Closing down is not an option when you have invested deeply in a jurisdiction. But yes, given that the law revolves around interest income are going through a change, offshore banks will have to review their business model,” he cautioned.

This line of thought has already been echoed by Mauritius’s second largest bank SBM Holdings chairman Kee Chong Li Kwong Wing. Another big Segment B contender, Barclays Bank Mauritius Limited has stated that only 12% of its Global Business deposit base is linked to the Indo-Mauritian DTAA, foreseeing therefore no major impact on its activities.

HSBC Bank Mauritius, which is a subsidiary of the HSBC group, is however in wait-and-see mode. A spokesperson of the bank explained that it is too early to assess the recent developments and their implications clearly. While Standard Chartered Bank Mauritius, which forms part of the Standard Chartered Group, has stated having insulated its business from any risk related to the new Protocol and that it fully supports the Mauritius and India governments’ endeavour to combat financial crime through treaty abuses and round tripping.

“In line with our strategy of banking the people and companies driving investment, trade and the creation of wealth across Asia, Africa and the Middle East, the bank has a well-diversified business model supported by our aspiration of linking the world to Africa through Mauritius,” highlighted Mathieu Mandeng, Chief Executive Officer of Standard Chartered Bank Mauritius.

Time will tell whether the new Protocol coming into force will do justice to expectations or apprehensions. In the meanwhile, Mauritius should be attracting an important flux of investment geared towards India; remnants of the once-upon-a-time ‘most preferred offshore jurisdiction’.