Wednesday, November 5, 2008

Japan Tobacco FDI deal hits Mauritius tax controversy

Surajeet Das Gupta & Ashish Sinha/Business Standard / New Delhi November 5, 2008

Finance ministry warns FIPB against ‘treaty shopping’ proposals.

The government might put on hold foreign direct investment (FDI) proposals routed through Mauritius pending the revision of the current double taxation avoidance treaty with India.

This became evident after the department of revenue advised the Foreign Investment Promotion Board (FIPB) last week to reject a proposal by Japan Tobacco International (JTIL) Mauritius Pvt Ltd, a unit of the world’s third largest tobacco company, to raise its stake in its Indian venture from 50 to 74 per cent on grounds that it comes under "treaty shopping".

"Treaty shopping” refers to the practice of routing investments by companies through a country like Mauritius that has a tax agreement with India. In this case, JTI Mauritius is looking to infuse $100 million in JTI India by increasing its stake.

A memorandum from the finance ministry to FIPB said if JTIL’s foreign investment proposal is routed through the Mauritius unit, future capital gains, should JTI Mauritius sell its shares, will not be taxed under the provisions of India-Mauritius Double Taxation Avoidance Convention (DTAC).

"The government is making consistent efforts to revise the India-Mauritius DTAC due to substantial revenue losses on account of treaty shopping," the memorandum said.

The note added that "According approval to obvious cases of treaty shopping through the FIPB route would amount to tacit acceptance of treaty shopping. This is likely to send contradictory signals to the Mauritius government with whom we are trying to revise the treaty for the last so many years...."

Sources said the finance ministry had recently also objected to proposals of companies that have routed their FDI proposals through Mauritius. These include that of private equity firm 3i, which wants to invest about Rs 800 crore in Krishnapatnam Port Company (KPCL). And in August a proposal by Cyprus-based Daltotrade to take a shareholding in Meta Telecomm was also rejected on similar grounds since Cyprus is also a tax haven.

FDI has been rising sharply from Cyprus and Mauritius, compared with inflows from developed countries like the United States and the United Kingdom. From an inflow of $58 million in 2006-07, FDI from Cyprus rose to $834 million in 2007-08. In the first two months of the current fiscal, FDI from Cyprus stood at $177 million.

Similarly, FDI from Mauritius rose from $6.3 billion in 2006-07 to $11 billion the next year. In the first two months of the current fiscal, FDI from Mauritius stood at $2.85 billion.

With overseas companies structuring their investments to maximise benefits and minimise tax cost by routing investments through tax havens, preventing abuse of tax treaties is high on the agenda of the Indian revenue authorities.

JTIL's proposal is considered a test case, given that there has not been any application to FIPB related to tobacco since 1998 owing to vehement opposition from the domestic tobacco lobby and parts of the government.

JTIL, that owns cigarette brands like Winston and Gold Cost (launched in Bangalore, Kerala and Mumbai last year) and Camel (yet to be launched in India) is looking for government clearances to expand its presence in the Rs 17,000-crore branded cigarette market that is growing at 8 to 10 per cent a year.