RS GUJARAL: “GAAR NOT TARGETING MAURITIUS”India's Finance Secretary, RS Gujaral insists that GAAR isnot targeting Mauritius specifically. In an interview to theEconomic Times of India, Mr Gujaral said that Mauritius hasalways taken a stand against abuse of the tex treaty. This iswhat he said to the daily:

« Let me clear that GAAR is not targeted at any country.Mauritius has, in fact, over the last year, assured India thatthey will not allow the Mauritius treaty to be abused. Abuseof treaty will occur only when an arrangement is found im-permissible.

So if you have a mere post box operation and no establishment but show thatyou are trading on the Indian stock exchange whereas actually you are doing it sit-ting in New York then it is impermissible. That is misuse of the treaty and GAARwill get invoked.

But if actually the investor is established there and is trading from Mauritius orSingapore or wherever then GAAR will not be invoked. Till we can get any treatyprovisions amended, treaty provisions will apply. GAAR is not targeted at any par-ticular category of foreign investor or any particular country. These are generalanti-avoidance rules which are applicable on companies which are liable to pay taxin India and who are seeking to avoid or reduce tax.

These are standard rules applicable in over 30 countries. We have tried to putadequate safeguards to ensure that GAAR is not misused to harass any honest andgenuine taxpayer. We will bring more measures to address concerns of investors ».

FOREIGN INVESTMENT WILL NOT SUFFER, SAYS PRANABMUKHERJEE

India's Finance minister Pranab Mukherjee believes therewill be no impact on foreign investments despite the com-ing of the GAAR. In a statement made in the Indian Parlia-ment, Mr Mukherjee said that the proposed amendmentthat would make all indirect transfers taxable were clarifica-tory in nature and would not hurt foreign investments.

Mukherjee said the provision will not override the provi-sions of the Double Taxation Avoidance Agreements(DTAA) with 82 countries. Proposed amendments "justclarify" what is already there in law, remove ambiguity andprovide certainty, he said in Lok Sabha

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WILL LIFE CHANGE IFGAAR IS ADOPTED ?The Indian Government is going ahead with the General Anti-Avoidance Rule (GAAR) in its next budget. Allexperts believe that it could have an impact on offshore activities linked with double taxes agreements withother jurisdictions including Mauritius. But India wants to cool down these consequences | LEEVY FRIVET

GENERAL ANTI-AVOIDANCE RULE

ALL REPORTS seem to targetthe alledged abuse by thedouble tax treaty by Mauri-tius behind the reasoning ofthe coming up of the Gene-ral Anti-Avoidance Rule(GAAR). Although the ques-tion is being debated in theIndian Parliament, there's no real chances that the ruleis not adopted. “They willadopt it, there is no way to stopthat. The only thing that may change could be the finalmeasures”, said a Director of a Mauritian ManagementCompany to Capital.

The Economic Times ofIndia stated that private eq-uity firms are choosing Sin-gapore as Mauritius is losingits attractiveness in the sec-tor. The paper added thatAmong the early movers are3i, Europe's biggest listedprivate equity firm, CX Part-ners and Edelweiss Capital,with industry analysts sayingmore are expected to followtheir example in the comingmonths.

3i, whose first India fundwas based in Mauritius, willmake Singapore the home of

a new $1.2 billion fund it isnow raising, said a personwith direct knowledge of thedevelopment. CX Partners,founded by former Citgroupexecutive Ajay Relan, is inthe market for $300-350million. Edelweiss Capital,which too is looking to raisemoney, has appointed VivekKalra as its managing direc-tor to be based in Singapore.

“Private equity funds so farjustified their presence inMauritius as they enjoyed taxbenefits there. But withoutthose benefits, Singapore, witha substantial financial com-munity, is a more convenientlocation”, Mahendra Swarup,president of the Indian Pri-vate Equity and VentureCapital Association said.

The Economic Times of

India believes that Singapore,apart from being a sophisti-cated financial hub, is seen tooffer additional benefits. For-eign investors need not paycapital gains tax if a fund hasbeen operational in thecountry for two years or in-curs expenditure of about200,000 Singapore dollarsevery year in the country.

This has led to investorsbelieving that the India-Sin-gapore Double TaxationAvoidance Treaty which of-fers certain provisions whichthe India-Mauritius DTAAdoes not allow, can satisfy theanti-avoidance stipulations.However, some tax expertsare not so sanguine. “This isnot so automatic; this interpre-tation is not very clearly ob-tained at present”, they say.

They will adopt it, there is no way tostop that. The only thing that maychange could be the final measures

A Director of a Mauritian Management Company

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❚ What is a private equityfund and how does it ope-rate?In simple terms, a private

equity fund is an investmentcompany which seeks at effect-ing investment in private com-panies and thus holding astake in such companies. It willas a rule not hold publiclytraded securities. It may alsoinvest in private placements ofpublic companies. By this Imean securities that are not of-fered to the general public ortraded in the public securitiesmarket. Generally private eq-uity funds tend to be closedend funds, that is the life ofthe fund is limited to a certainnumber of years, say 7 to 10years. The investors in such afund would raise their fundsfrom high net worth individu-als, pension funds, institu-tional investors and otherinvestment managers. The in-vestors would have a passiverole with limited voting rightsand decisions as regards mana-gement and investments arevested with the InvestmentManager. The shares held bythe investors are highly illi-quid.

In Mauritius a private eq-uity fund is set up as a collec-tive investment scheme andthe entity is incorporated as acompany under the Compa-nies Act 2001. The companycan be a private company or apublic company with a limitedlife. The CIS has a board of di-rectors and quite often thepromoters would also set up aCIS Manager (which is ano-ther global business companywith a separate board of direc-tors) whose main object is tomanage the investments andassets of the CIS. With theenactment of the Limited Part-nership Act 2011, it will nowbe possible for a private equityfund to be set up as a limitedpartnership. Any fund must belicensed by the Financial Ser-vices Commission and theymust comply with the licen-sing conditions set by the FSC.

See page 10

YUVRAJ JAWAHEER

« The GAAR should be thewake up Call for Mauritius »Yuvraj Jawaheer, partner of law firm Bedell Cristin (Mauritius) believes that the implications of GAAR would be the same for Mauritius and Singapore. He disagreesthat there is a massive move of private equity funds companies from Mauritius to Singapore. He rather believes that the new rules should be a wake up call | LEEVY FRIVET

❚ Private equity funds havebeen a success in Mauri-tius...They have been a success

for many reasons. Our juris-diction is well regulated withthe proper legislations in placeand modern features whichmeet the expectations of inter-national clients. Most impor-tantly, I think we have thehuman resources, qualifiedprofessionals, accountants,lawyers and graduates and themodern infrastructure and fa-cilities such as software to pro-vide a quality service in a costeffective manner. Also the factthat we have a strong networkof Double Taxation AvoidanceAgreements, Fund Managersobviously find it tax efficientto structure funds throughMauritius and optimize the re-turns to their investors.

❚ What are the differencesbetween the tax treaty thatMauritius has with Indiaand the one India has withSingapore?The same benefits are avail-

able under both treaties. How-ever, the treaty which India haswith Singapore has a limitationof benefit clause. Further-more, a Singaporean Companymust have an annual expendi-ture of at least S$ 200,000 inthe immediately preceding pe-riod of 24 months from thedate the gains arise. There is nosuch requirement for a Mauri-tius entity so far nor a limita-tion of benefit clause.

But I would wish to makeone point. Whilst India has aDTAA with Singapore, it isworth noting that Article 6 ofthis treaty states:

“This Protocol shall remainin force so long as any Con-vention or Agreement for theAvoidance of Double Taxationbetween the Government ofthe Republic of India and theGovernment of Mauritius pro-vides that any gains from thealienation of shares in anycompany which is a resident ofa contracting State shall be tax-able only in the ContractingState in which the alienator is aresident”.

❚ What are your reactions onthe risks of Private EquityFunds companies to choseSingapore rather thanMauritius?The General Anti-Avoid-

ance Rule “GAAR” is a domes-tic rule in India to come inforce when the Indian budgetis adopted. It will apply toMauritius and to Singaporealike. I wish to highlight thatthe Tax Residency Certificateof a Mauritius company is still

applicable and the ruling ofSupreme Court of India to thiseffect lies very much in favourof Mauritius. Whilst there isuncertainty it would be incor-rect to say that there is a mas-sive flight to Singapore.

I think that the GAARshould be the wake up call forMauritius. Whatever be theoutcome after the adoption ofthe budget which is due tohappen in May, we have to re-think our strategy. Whilst weshould do every effort to pro-vide a greater value added serv-ice and quality service inrelation to the business whichis attracted by the India-Mau-ritius DTAA, I believe thatMauritius should be able topursue as a platform for inter-national investors to structureinvestments to India and otheremerging markets. We shoulddiversify, go for new productsand services such as privatewealth management, provideenhanced quality service andgive value for money. Singa-pore is definitely a very effi-cient jurisdiction and acountry with which Mauritiushas excellent relations. How-ever, I am convinced that wehave enough talents and skillsin Mauritius which can matchthe service expectations of in-ternational clients. From aMauritius perspective, what isrequired is serious action tomake of Mauritius a destina-tion where efficiency is felt atall levels and spheres of activi-ties and services. It is also cru-cial for the promotion ofMauritius to be made consis-tently and with the appropriateresources.

❚ The Indian Governmentseems determined to comeup with GAAR in its nextbudget. What could be itsimplications?Much will depend on the

final shape of the measures. Atthis stage as you are aware, thebudget is still at debate stage inthe Lok Sabha. It may be sub-ject to changes and amend-ments. It is expected to befinalized sometime in May andto come into effect after thatthe regulations are in place. Asit stands today, the Mauritiusroute will no longer be prisedby foreign investors as theymay have the apprehensionthat their investment can bequestioned by the Indian taxauthorities for not havingcommercial substance and forchosing the Mauritius routesolely for taking a tax benefit.

How do you react when youhear Indians claiming thatMauritius is a tax haven?

Let me say it emphaticallythat Mauritius is not a taxhaven. It is a low tax jurisdic-tion. The tax rate for corpo-rates and individuals is 15%.The tax rate in Singapore is18%. Global business compa-nies are liable to tax at 15% inMauritius and are eligible to aforeign tax relief of 80% ontheir income which has the ef-fect of the companies paying anet 3% tax. More than 20% ofthe tax collected by the MRAcomes through Global businesscompanies. True it is thatthere is no capital gains tax inMauritius but this should notjustify a wrong perception ofMauritius and a different oneon Singapore. May I also men-tion that Mauritius is on theOrganisation for EconomicCo-operation and Develop-ment (OECD) white list andthe scrutiny of the OECD onMauritius for this purpose hasbeen a rigorous one.

❚ They also argue that theIndia-Mauritius DTAAbenefits only Mauritius...Politically, the treaty as it

stands benefits both Mauritiusand India. However, there is aperception in India that it islosing significant amount oftax money and there are strongsuspicions of round tripping.To allay these concerns and toensure that the treaty benefitsboth Mauritius and India thetreaty can be strengthened toensure tax transparency andexchange of information. Mau-ritius should provide assu-rances of greater value addedin structuring investments inMauritius in the same vein asthe India-Singapore treaty.

❚ So you see no need to re-view the treaty?Obviously we prefer busi-

ness to continue as usual butwe must accept that we are fac-ing a new situation. As I men-tioned earlier on we mustendeavor to reinforce the treatyalong the lines mentioned, i.egreater value added etc. Thisbeing said we should also notexclude diversifying to cater fornew needs and destinationssuch as the African continentwhich has all the potential of agreat emerging market.

❚ How much do Global Busi-ness Companies, includingPrivate Equity Funds con-tribute in the economy ofthe country?I think it would be in the

region of 4-5% of the GDPbut this would in my view alsoinclude the legal services, auditand additional services such asbanking services and contribu-tions to the hotel industry.

❚ The Economic Times ofIndia states that Mauritiusis fast losing its attractive-ness? What could be thereasons for that?I think that there has been a

consistent and persistent attack

on the treaty over many yearsand quite often without muchevidence and justification. Ine-vitably this has contributed tothe uncertainty. The recentproposed amendments in Indiawill diminish the interest of in-vestors because of the tax un-certainty.

❚ Is your firm following thetax treaty discussions be-tween Mauritius and Indiaand do you fear the out-come of such discussions?We are a law firm commit-

ted to provide legal services toour clients both locally andoverseas and are confident ofthe potential of the Mauritiusjurisdiction. We see our stra-tegy to develop our business inthe region having a long termview of the industry. BedellCristin will face the challengeswhatever they may be with as-surance. We will respond tonew challenges with products,markets and services.

❚ Reports in England saidthat Mauritius hosts toomany shelf companies andthat these companies areways for money laundering,evading tax. Your opinionson such critics.This is not true. All global

business companies which areformed to take advantage oftreaty benefits must submit anapplication to the FSC for acategory 1 global business li-cence. It would take a mini-mum of a week to process theapplication for such a com-pany.

The application comprisesthe statutory applicationforms, a business plan, KYC(Know Your Client) docu-ments on the promoters, direc-tors and shareholders and theManagement Company has tomake its due diligence as re-gards the sources of the funds.So, such companies are notavailable off the shelf.

Incorporator companies areset up as off the shelf compa-nies. However, when the Man-agement Company sells thecompany to a client, it mustcarry out its due diligence withthe same rigour as it would dofor a category 1 global businesscompany. Furthermore, I needto say that the FSC regulatesManagement Companies andeffects an on-site inspection ata regular interval and thismonitoring is complementedby reporting to be effected bythe Management Companieson a risk based approach. Thereporting should cover theirclient acceptance, customerdue diligence, internal repor-ting system etc.

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We should diversify, go fornew products and services suchas private wealthmanagement,provide enhancedquality serviceand give value for money