Tax authorities worldwide distaste the word “treaty shopping” as such. In recent times, OECD has worked out guidelines for BEPS and most U.S. tax treaties have “Limitation of Benefit” clause that prevents abusive tax planning. However, there may still be some opportunities available to U.S. investors in India; one such avenue is investing via Mauritius Holdco structures.
A lot of foreign investors prefer to route their investment through Mauritius in India. Since the India- Mauritius double tax avoidance agreement offers exemption from capital gains tax to Mauritian residents. It has been the key incentive provided by the Indo-Mauritius tax treaty where by tax on capital gains is exempted for investors from Mauritius. As per the last finance bill almost 42% of the foreign direct investment into India is routed through Mauritius.
The Indian High Court recently upheld that The Tax residency Certificate issued by Mauritius authority would be sufficient in claiming the tax benefit.
In a recent verdict by Indian High Court against the advance ruling made to Serco BPO Private Limited, the court upheld: “Once it is accepted that the certificate has been issued by the Mauritian authorities, the validity thereof cannot be questioned by the Indian authorities.”
The Income Tax authority raised questions on the residency of Blackstone Mauritius and Barclays Mauritius and was of the opinion that selling of shares of SKR BPO was mere a tool of tax avoidance.
Few important takeaways from the court decision:
- The tax resident certificate is sufficient evidence to establish the taxpayer as resident of Mauritius.
- Capital gains routed through investment into India through Mauritius would remain not taxable.
Though 2013 Indian Budget bill raised the same issue that mere residency certificate though necessary but may not be sufficient to claim benefits of the India – Mauritius Income tax treaty. The Income tax authority might have wider discretion to determine whether a foreign investor had used treaty benefits for the only reason of tax avoidance.
Recent High Court verdict is welcome news for foreign inbound structures. Accordingly, once the Tax Residency Certificate is received from Mauritian authority, the treaty should not be questioned to.
International legal and independent professionals consulting in India often have issues receiving funds from their clients in India. India has stringent exchange control regulations contained in the Act called Foreign Exchange Management Act – FEMA. Accordingly all foreign remittances must go through certain procedures. Additionally, Income Tax Department asks for “Tax Residency Certificate” (TRC) from the US service provider so that the treaty benefits can be allowed. If TRC is not produced, the payer must withhold tax from the income remitted to US service provider. This is true regardless of where the services were provided.
Until recently, it was mandatory that TRC issued by foreign tax authority must contain all items required by the government of India in order to exempt any tax withholding requirements. As many of us are aware, Internal Revenue Service issues the US tax residency certificate in Form 6166 which cannot contain additional information as required by government of India. Due to this, in many cases, the Indian income tax department rejected the TRC issued by IRS and that resulted in withholding tax in India.
However, after a few representations, the government of India and the tax department agreed to accept the US residency certificate in its present Form 6166.
Accordingly the following documents are required to successfully receive payments form Indian companies without any withholding:
- Form 10F
- Permanent Account Number (PAN or tax ID number)for India
- US Form 6166 for the relevant tax year
- Signed letter on US law firm’s letterhead stating that the law firm does not have a permanent establishment (PE) in India under the US – India tax treaty article.
Since the tax year in India runs from April 1 to March 31st, it is possible that some clients in India may request that the firm provide TRC issued by IRS in 2015 for payments processed in January through March 2015. Therefore US law firms may want to begin the process of collecting relevant data and partner signatures in advance, so as to file Form 8802 in a timely manner. This will expedite the process to receive TRC from IRS soon. Note that currently IRS charges a $85 user fee and processes the TRC within 45 days.
Please contact us to receive our assistance on both sides of the border.