03 August 2024
The term **"Mauritius route"** refers to a tax avoidance strategy used by multinational companies and investors to minimize their tax liabilities through a combination of tax treaties and financial arrangements involving Mauritius. Here’s a detailed breakdown:
### **Mauritius Route Overview**
**1. **Tax Treaties and Double Taxation Avoidance Agreements (DTAAs):** - Mauritius has been known for its favorable Double Taxation Avoidance Agreements (DTAAs) with many countries, including India. - These treaties often provide for reduced rates of withholding tax on income such as dividends, interest, and royalties. - They also provide mechanisms to avoid or reduce double taxation, making Mauritius an attractive destination for routing investments.
**2. **Tax Benefits in Mauritius:** - Mauritius offers relatively low corporate tax rates and does not levy taxes on capital gains. - This creates a favorable environment for routing investments, as entities based in Mauritius can benefit from the absence of capital gains tax and low effective tax rates.
### **How Tax Avoidance Works Through the Mauritius Route**
**1. **Establishing a Company in Mauritius:** - Investors or companies often set up a subsidiary or a holding company in Mauritius. - This Mauritius-based entity then becomes the intermediary for investments into other countries.
**2. **Routing Investments:** - An investment is routed through the Mauritius entity to the target country. - For example, an Indian company might invest through a Mauritius-based holding company to take advantage of the DTAA between India and Mauritius.
**3. **Tax Benefits:** - **Reduction in Withholding Tax:** By routing investments through Mauritius, entities can benefit from reduced withholding tax rates on income like dividends and interest. - **Capital Gains Exemption:** Mauritius does not tax capital gains, so if a company sells shares or other assets, it might avoid capital gains tax that would have been payable in other jurisdictions.
**4. **Dividend Flows:** - Companies in Mauritius may receive dividends from foreign subsidiaries. Due to favorable tax treaties, these dividends might be subject to reduced withholding tax rates.
**5. **Tax Avoidance Concerns:** - **Treaty Shopping:** Companies may set up entities in Mauritius primarily to exploit the benefits of the DTAA without having substantial business activities there. This is known as treaty shopping. - **Base Erosion and Profit Shifting (BEPS):** The strategy can lead to base erosion and profit shifting where profits are shifted from high-tax jurisdictions to low-tax jurisdictions, reducing the overall tax liability of multinational corporations.
### **Regulatory and Legal Developments**
**1. **Anti-Avoidance Measures:** - Many countries, including India, have introduced anti-avoidance measures to address the use of Mauritius as a tax avoidance route. These measures include stricter criteria for tax residency and economic substance requirements for Mauritius entities.
**2. **Amendments to DTAAs:** - The DTAA between India and Mauritius has undergone amendments to prevent misuse. For instance, the protocol signed in 2016 aimed to limit the benefits of the tax treaty to genuine investors with significant economic substance.
**3. **OECD Guidelines:** - The OECD's Base Erosion and Profit Shifting (BEPS) guidelines have prompted countries to review and revise their treaties and tax policies to prevent tax avoidance strategies involving jurisdictions like Mauritius.
### **Example Scenario**
**Example:** - **Investment Structure:** An Indian multinational sets up a holding company in Mauritius. This Mauritius company then invests in another Indian company. - **Tax Benefits:** Dividends paid by the Indian company to the Mauritius holding company are subject to a reduced withholding tax rate due to the DTAA. Furthermore, if the Mauritius holding company sells its shares, it avoids capital gains tax in Mauritius, potentially reducing overall tax liability.
**Summary:** The "Mauritius route" involves using Mauritius as a conduit for investments to leverage favorable tax treaties and low tax rates. While this can provide significant tax benefits, it has faced scrutiny and regulatory changes aimed at curbing tax avoidance and ensuring that such structures are not used solely for the purpose of tax evasion.
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