At least half a dozen FPIs were recently asked by the income tax (I-T) department to submit copies of the application forms they had filed with the Mauritius Revenue Authority (MRA) for obtaining tax residency certificate (TRC). The declarations made in the application forms would reflect whether the FPIs have adequate ‘substance’-office, employees, assets, etc-in Mauritius.
In the absence of substance, the tax department may question treaty benefits like zero tax on stock gains from sales of shares bought before April 2017 and profits from stock derivative trades on Indian exchanges.
The TRC enables investors from Mauritius to benefit from double taxation relief under various treaties that Mauritius has signed with other countries.
Tax practitioners who have come across such cases told ET that it was the first time that the I-T department has asked for such information.
“Recently, in cases of scrutiny under section 142 (1) of the I-T Act, the department told some FPIs from Mauritius to submit their TRC applications. About 5 years ago, FPIs had to also separately submit a similar form to the Financial Services Commission (FSC) (the markets regulator in Mauritius). These additional documents are being sought over and above the TRC. It’s not clear why. Never before these details were sought in any scrutiny cases. It is also unclear whether treaty benefits can be questioned based on the declarations made in TRC applications. FPIs have to respond in ‘yes’ or ‘no’ to questions in the application form,” said RP Soni, partner at the CA firm NGS & Co.Some of the questions in the TRC application form are a giveaway to an FPI’s setup in Mauritius: whether the applicant has an office and ’employs on a full-time basis at administrative/technical level, at least one person who is a resident of Mauritius’; whether the applicant’s constitution lays down that disputes would be resolved by way of arbitration in Mauritius; if the applicant holds at least $100,000 assets in Mauritius (excluding cash held in bank account or shares in another company holding global business licence in Mauritius; and, if yearly expenditures are comparable to a similar company controlled and managed from Mauritius.
Narendra Soni, partner at the CA firm SVND & Associates, said, “It’s essential to recognise that the MRA has already verified an FPI’s economic substance before issuing the TRC. Therefore, it’s reasonable to rely on the TRC as proof of substance. I hope the authorities will reconsider their approach and accept the TRC at face value, rather than re-examining the underlying application details. This would provide the much-needed clarity and stability to foreign investors.”
While the department is yet to invoke General Anti-Avoidance Rules (GAAR) or any ruling to deny treaty benefits on the basis of information in TRC application, the documents are being sought at a time many are awaiting the outcome of the court battle (about the validity of TRC) between Tiger Global, an offshore investor, and the revenue department. According to Ashish Karundia, founder of the CA firm Ashish Karundia & Associates, “Invoking the principal purpose test (PPT), once notified, would be comparatively easier than applying GAAR, as PPT can be triggered if even one of the main objectives of an arrangement is to derive tax advantage.
Unlike GAAR, PPT (which is part of the treaty) application does not require meeting any monetary threshold or obtaining prior approvals from higher authorities or the approving panel. Regardless of how the Supreme Court rules on Tiger Global, tax authorities can still deny treaty benefits where it can be factually shown that an entity lacks commercial substance and was merely interposed for tax avoidance purposes-a principle already upheld by the apex court well before the introduction of PPT in the Vodafone International Holdings BV ruling.”
Content Source: economictimes.indiatimes.com