A study of information exchange and transparency of tax and investment rules in Mauritius - viewed even by sections of the government as a source for re-routing illicit money back into India - could cause further embarrassment to the government, already under attack for not doing enough to check the accretion of ill-gotten wealth stashing it in foreign havens.
The Organisation for Economic Cooperation and Development (OECD), the agency that has been at the forefront of the global crackdown on tax havens, on Friday said India's double tax avoidance agreement (DTAA) with Mauritius has gaps that need to be filled. In addition, it concludes that Mauritius has lax norms that provide room for routing funds from one country to another.
As an example, it said that a nominee could register a company with the Mauritian registrar of companies (RoC) on behalf of another person. The RoC does not check whether the shareholders mentioned in an application are actual shareholders of the company or not. The study also found that only a shareholder, officer, management company or registered agent of offshore companies based out of Mauritius could access the register of companies.
This is in line with fears expressed by Indian authorities that re-routing of funds is taking place through Mauritius. Tax officials suspect that Indian nationals are sending black money overseas and then getting it back into the country via Mauritius. On its part, Mauritius has maintained that tightening of rules has made it tough for investors to get into such transactions.
The lack of transparency is often cited as the reason for global investors based in the US and Europe opting to route investment into India through Mauritius. India accounts for over half the investment made by companies based in Mauritius. In addition, the low tax rate for foreign companies, which goes to a maximum of 3 per cent, is said to be another attraction. In any case, capital gains tax is exempted due to the provisions of the DTAA between India and Mauritius.
Though Indian tax authorities have been negotiating amendments to the treaty for insertion of a limitation of benefit clause, the absence of political will has stalled the process and means that the loopholes remain unplugged.
The OECD study said that there were other loopholes too. For instance, the treaty allows for disclosure of information to the persons in respect to whom information or document had been sought.
It also showed that even in cases where guidelines to track investors and details of their wealth are available, the Mauritian authorities have not been able to make full use of the provisions.
For instance, the DTCs with India allow for automatic exchange of tax information on a routine basis, but Mauritius has not exchanged information over the last three years. Also, Mauritius does not seem to have done its bit in informing countries such as India with whom it has tax treaties about an amendment to its domestic laws that now allow for sharing information on non-residents and offshore companies that do not pay tax in Mauritius.
The report said the anticipation of non-response from Mauritius prompted many countries not to seek information.