BREAKINGVIEWS: Singapore may not escape India's offshore tax grab

MUMBAI Tue Apr 10, 2012 2:13pm IST

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A bank employee checks a 500 rupee note at a counter in Mumbai October 25, 2008.

Credit: Reuters/Punit Paranjpe/Files

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MUMBAI (Reuters Breakingviews) - India's offshore tax grab is bad news for Mauritius. Some investors on the island have responded to the country's crackdown on tax avoidance by shifting their operations to Singapore. Yet while the city-state is a better established financial centre, the very act of hopping islands may attract the interest of the authorities.

Mauritius owes its tax status to historic ties with India, which resulted in a treaty signed in 1983. It's certainly been successful - over 40 percent of portfolio investment and more than 42 percent of foreign direct investment into India emanate from the tropical paradise. But the long, tax-free holiday may be coming to end.

New Delhi's overhaul of its tax regime goes wider than just trying to claw back tax on Vodafone's (VOD.L) purchase of Hutchison Whampoa's mobile business, which was controlled by an offshore entity based in the Cayman Islands. The government has also proposed general anti-avoidance rules which will over-ride existing treaties.

The new regulations, which look likely to come into law this month, place the onus on investors to prove they are not operating a business model that is explicitly structured to avoid tax. Most investments channelled via Mauritius will struggle to clear this hurdle: often the only connection to the island is the address of the investor's law firm.

Hence the rush to Singapore, which also has a treaty with India that applies a zero tax rate on short-term capital gains. Investment managers will have less difficulty arguing that they have a substantive business operation in the financial centre.

But the anti-avoidance rule could be a trump card. Any fund which shifts its location from Port Louis to Orchard Road will struggle to argue it did so for any reason other than avoiding tax. Besides, if India's objective is to close loopholes and increase revenue, then it's not at all clear why it would crack down on Mauritius while leaving Singapore untouched.

The ambiguity means that funds will have to pass on the risk to their customers - or even pull out altogether. Though the Indian government is making moves to reassure investors, its track record is shot through. Even a favourable Supreme Court ruling wasn't enough to protect Vodafone. If investors respond by simply turning to safer markets, then Mauritius, Singapore - and India - could all lose out.

CONTEXT NEWS

- The International Chambers of Commerce, a global trade association which represents over 100,000 businesses, and the Business & Industry Advisory Committee to the OECD, have written to the Finance Minister raising concerns about the impact of his March 16 budget proposals to amend India's tax rules, the Business Standard newspaper reported on April 10.

- Foreign brokerages are worried about new tax proposals, designed to tax indirect investments and combat tax evasion in India. Senior officials from the finance ministry met with foreign investors including JP Morgan, CLSA, Morgan Stanley and Goldman Sachs, on April 4 to try to clarify how the new proposals would be implemented.

- The Asia Securities Industry and Financial Markets Association, a lobby group, published a letter to Finance Minister Pranab Mukherjee on March 28, expressing "deep concern," and asking for the government to clarify its stance.

- At the heart of its concerns are two provisions announced this month. The first gives India power to retroactively tax the indirect transfer of assets, which was widely seen as targeting Vodafone's $11 billion purchase of Hutchison Whampoa's Indian assets.

- The second targets tax evaders via the General Anti-Avoidance Rule (GAAR), putting the onus on investors registered in countries with special tax exemptions with India to prove they do not intend to explicitly avoid taxes.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

(Editing by Peter Thal Larsen and David Evans)

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