ACCORDING to the Mauritius government website, the island nation has 43 double tax avoidance treaties in force; 8 treaties await ratification; 4 treaties await signature. That apart, 18 treaties are being negotiated. (http://www.mra.mu/index.php/taxes-duties/double-taxation-agreements). Mauritius will therefore have a large tax treaty network involving 73 countries/jurisdictions. That's really a large number of comprehensive tax treaties for such a small island nation.

Mauritius became world famous by allowing its treaty networks to be used by foreign companies to invest in India and in some other jurisdictions. As a result, Indonesia terminated its tax treaty with Mauritius, China renegotiated its treaty; South Africa renegotiated its treaty and also entered into a Memorandum of Understanding in 2015 and as everyone knows, at long last, India also renegotiated the tax treaty.

The problem with Mauritius is that it, like some other small jurisdictions wants to promote itself as an offshore financial centre that allows foreign companies easy incorporation and at the same time allows these companies to claim to be resident of Mauritius and therefore eligible to avail of the tax benefits of its tax treaty network. Mauritius also tries to follow the OECD Model despite being part of the developing world. This encourages treaty shopping and round tripping. While with India it was perhaps more a case of treaty shopping, it seems the problem of South Africa was more of that of round tripping. That is the reason why in the MOU that South Africa signed, criteria for determination of the place of effective management by the Competent Authorities are clearly mentioned. According to the MOU, the following factors should be kept in view in determining where a company is resident for purposes of the tax treaty:

It may also be noted that despite the US companies extensively using Mauritius, USA does not have a comprehensive tax treaty with Mauritius. The USA however, has a tax information exchange agreement which is typically entered with tax havens. It is also interesting to note that when the OECD started its harmful tax practices project in 1998, Mauritius was identified as one of the suspect jurisdictions. But then, it made an advance commitment to the OECD to make changes to its structures to make them compliant with the OECD guidelines. It is well known that the 1998 project finally fizzled out because of the opposition of the USA and there was no serious follow up till the financial crisis again brought the issue of tax avoidance to the fore. This resulted in the BEPS project and the OECD again put harmful tax practices back on the agenda. The main aspect of the project is now exchange of information and even though there is some teeth to the project in the form of a peer review where a tax jurisdiction's performance in regard to the EOI is actually examined, so long as EOI takes place, other aspects of a jurisdictions laws like allowing foreign companies to set up base etc., does not seem to be a concern.

For quickly putting in place the changes in the treaties that were proposed in the BEPS project, the MLI was invented. A grand signing ceremony involving 69 jurisdictions and 68 countries took place in Paris. MLI has some compulsory minimum standards. One of these is supposed to be prevention of tax treaty abuse. Pascal Saint Amans of the CTPA grandly declared that with the signing of the MLI, treaty shopping will come to an end. One was therefore interested to see what Mauritius, the prime enabler of treaty shopping, at least in so far as India is concerned would do. As it happened, Mauritius did not sign the MLI on the appointed day but again made an advance commitment to sign it by the end of June. This time however, Mauritius actually signed the MLI on July 5th, 2017. It will therefore be useful to examine some of the positions taken by Mauritius in the MLI.

Very interestingly, Mauritius has given a list of 23 jurisdictions that it intends to cover in its MLI. It includes South Africa but does not include either China or India. So, we do not know as yet what position it will take in its negotiations with India and for that matter with other developing countries.

Article 6 of the MLI deals with one of the main achievements of the entire BEPS project in stating in clear terms that the purpose of a tax agreement is not to create opportunities for treaty shopping and double non-taxation. It is a bare minimum and a reservation is possible only when there is a similar preamble to the treaty concerned.

Article 6 of the MLI states as follows– Purpose of a Covered Tax Agreement

1. A Covered Tax Agreement shall be modified to include the following preamble text: "Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions),".

2 (…)

3. A Party may also choose to include the following preamble text with respect to its Covered Tax Agreements that do not contain preamble language referring to a desire to develop an economic relationship or to enhance co-operation in tax matters:

"Desiring to further develop their economic relationship and to enhance their co-operation in tax matters,"

In its CTAs, Mauritius has chosen to apply both Article 6(1) and Article 6(3). It may be noted that the text described in paragraph 3 shall be included in a CTA only where all Contracting Jurisdictions have chosen to apply that paragraph and have made such a notification with respect to the Covered Tax Agreement.

Since in the Indian context, Mauritius is closely associated with treaty shopping, it is also interesting to examine the stand it has taken in its covered tax agreements in respect of Article 7 of the MLI dealing with the Prevention of treaty abuse. Here however, a number of options are available to countries.

Article 7(1) of the MLI says:

Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.

One of the principal purposes is sufficient to attract the provision. The burden of proof to prove otherwise would presumably on the taxpayer. This is the principal purpose test and this paragraph would apply in place of or in the absence of such a provision in the covered tax agreement. The drafting is comprehensive and also subjective to some extent.

The PPT test is the default standard and countries cannot get out of the same unless they exercise a reservation under Article 15(a) of the MLI that states as follows:

"15. A Party may reserve the right:

a) for paragraph 1 not to apply to its Covered Tax Agreements on the basis that it intends to adopt a combination of a detailed limitation on benefits provision and either rules to address conduit financing structures or a principal purpose test, thereby meeting the minimum standard for preventing treaty abuse under the OECD/G20 BEPS package; in such cases, the Contracting Jurisdictions shall endeavour to reach a mutually satisfactory solution which meets the minimum standard;…"

Mauritius has not made a reservation under article 15(a). Therefore the PPT test will apply in respect of its CTA. But then are there any options to those that have not made such a reservation?

That then leads us to Article 17. Article 17(a) says that each party that has not made the reservation under Article 15(a) shall notify the OECD of the agreements in this regard. Article 17(a) then also gives another option as follows:

"A Party making a notification under this subparagraph may also include a statement that while such Party accepts the application of paragraph 1 alone as an interim measure, it intends where possible to adopt a limitation on benefits provision, in addition to or in replacement of paragraph 1, through bilateral negotiation."

It may be recalled that as per the action plan, prevention of treaty abuse can be addressed in one of the following ways: an LOB along with a PPT; only PPT; or a detailed LOB provision, along with specific rules targeting conduit financing arrangements.

In terms of Article 17(a), Mauritius has stated that while it accepts the application of Article 7(1) alone as an interim measure, it intends where possible to adopt a limitation on benefits provision, in replacement of Article 7(1), through bilateral negotiation. It may also be recalled that India has opted for a simplified LOB provision along with PPT. It seems that Mauritius will probably go for a detailed LOB. Although detailed LOB is more objective, it is again possible to plan around the same.

In so far as the anti-abuse provisions are concerned, Article 7(4) of the MLI again gives another lifeline to the affected party in the following words:

"7(4). Where a benefit under a Covered Tax Agreement is denied to a person under provisions of the Covered Tax Agreement (…) that deny all or part of the benefits that would otherwise be provided under the Covered Tax Agreement where the principal purpose or one of the principal purposes of any arrangement or transaction, or of any person concerned with an arrangement or transaction, was to obtain those benefits, the competent authority of the Contracting Jurisdiction that would otherwise have granted this benefit shall nevertheless treat that person as being entitled to this benefit, or to different benefits with respect to a specific item of income or capital, if such competent authority, upon request from that person and after consideration of the relevant facts and circumstances, determines that such benefits would have been granted to that person in the absence of the transaction or arrangement. The competent authority of the Contracting Jurisdiction to which a request has been made under this paragraph by a resident of the other Contracting Jurisdiction shall consult with the competent authority of that other Contracting Jurisdiction before rejecting the request." No wonder that Mauritius has opted for this provision.

Other anti-avoidance provisions of the MLI:

Apart from the anti-abuse provision that is compulsory, the MLI contains a great many anti-avoidance provisions, like anti-hybrid provisions, provisions to deal with dual resident entities, adopting method of elimination of double taxation that does not end up in double non-taxation, minimum holding period to avail the benefit of favourable taxation of dividend, incorporation of provision of capital gains in respect of real estate companies, anti-abuse rule for third country PE, provisions relating to artificial avoidance of PE status, provisions to prevent splitting up of contracts etc.

All these provisions are important for prevention of base erosion and profit shifting. However, due to lack of consensus, these provisions have been kept optional and countries/jurisdictions have the possibility of opting out wholly or partly of the same obligations. It is interesting to observe that Mauritius has uniformly opted out of each of these provisions. It is also interesting to observe that India has opted in for most of these.

The only other compulsory provision of the MLI is the one relating to dispute settlement. Here, the Competent Authority process is proposed to be improved by allowing the taxpayer to approach either of the authorities and by promising to try to reach agreement within 3 years. There is also the provision relating to allowing corresponding adjustment in respect of transfer pricing adjustments in the absence of article 9(2). Mauritius has not expressed any reservation in respect of these articles.

Part VI of the MLI contains the provisions relating to arbitration. This is not compulsory although OECD pressed hard for it to be one. This Part apples in relation to two Contracting Jurisdictions with respect to a Covered Tax Agreement only where both Contracting Jurisdictions have made such a notification. Most of the developing countries have rejected this part. India has also opted out of the same.

But, in line with major investor jurisdictions, Mauritius has opted for the same. This further confirms the suspicion that Mauritius intends to continue with its conduit nature for investments from other jurisdictions into India and other source countries.

Article 19 (12) of this chapter, however, provides: "A Party may reserve the right for the following rules to apply with respect to its Covered Tax Agreements notwithstanding the other provisions of this Article:

a) any unresolved issue arising from a mutual agreement procedure case otherwise within the scope of the arbitration process provided for by this Convention shall not be submitted to arbitration, if a decision on this issue has already been rendered by a court or administrative tribunal of either Contracting Jurisdiction;

b) if, at any time after a request for arbitration has been made and before the arbitration panel has delivered its decision to the competent authorities of the Contracting Jurisdictions, a decision concerning the issue is rendered by a court or administrative tribunal of one of the Contracting Jurisdictions, the arbitration process shall terminate." Accordingly, Mauritius has recorded the same reservations.

Thus, although Mauritius has signed the MLI, its choice of jurisdictions and the range of its reservations indicate that, contrary to the claim of CTPA head, treaty shopping through Mauritius would continue, perhaps with a somewhat more complicated and more costly form.