GAAR: FPIs look to shift base from Mauritius, Singapore to France, Sweden, others
Going by newspaper reports, a clutch of FPIs investing in Indian markets through treaty countries like Mauritius and Singapore are looking at shifting base—or by setting up new entities—in countries like France, Sweden and the Netherlands where the tax treaties still provide arbitrage opportunities. While the reworked treaties with Mauritius and Singapore will allow Indian tax authorities to charge a 7.5% tax on short-term capital gains from April 1, 2017—and double that from April 1, 2019, on a par with that for any Indian citizen—treaties with countries like France allow capital gains to be taxed in the home country; since there is no tax applicable on long-term gains right now, this applies to short-term gains.
Though it may look lucrative to shift base, how many FPIs actually shift will depend upon a host of factors. For one, unlike in the case of Mauritius, it may not be as easy to set up post-office SPV-type of structures in countries like France that have their own financial regulators to inspect such practice. So, it is mostly FPIs that already have a base in Europe who are likely to operate out of there. Alternatively, some FPIs may choose to operate through the participatory note (P-Note) route offered by, say, French firms—indeed, the recent uptick in investments through the P-Note route are probably a result of such switching.
You May Also Want To Watch:
What such investors need to keep in mind, though, is with the General Anti Avoidance Rules (GAAR) coming into force from April 1, the Indian taxman is perfectly at liberty to ask these investors for details about their structure. It is true the official Indian position is that just because money is coming from a ‘tax-efficient’ jurisdiction does not mean it will automatically be subject to GAAR, but if there is a surge in investments coming in from these jurisdictions, whether directly or through P-notes, this is certain to happen. If tax arbitrage is seen as the reason for investment, under GAAR, the treaty benefit can and should be denied. A grave danger of using GAAR, needless to say, is its penchant to be abused, and that is why it has been put off so many times. If the government wants to use GAAR to catch treaty-shoppers, as it must, it needs to be equally careful to check its abuse. If it does not, and that is a big challenge, India could well move back to the tax terror days, with FPIs waiting to desert it in droves. Renegotiating these treaties with countries like France is a better option, but how long that will take is not clear.