FDI via Mauritius dives in first half, Singapore gains

FDI via Mauritius dives in first half, Singapore gains

News:

Singapore becomes preferred country for routing FDI in India with a 77.77 per cent jump in investments.

Important Facts:

• In 2017-18, Mauritius was the top source of FDI into India with $13.41 billion investments followed by Singapore.
• According to RBI report, Mauritius, has witnessed a 69.3 per cent decline in foreign direct investment (FDI) in India in the first six months ended September 2018.
• Singapore which overtook Mauritius has turned out to be the preferred country for routing FDI with a 77.77 per cent jump in investments.

Why the shift:

• Amended DTAA (double tax avoidance agreement).
  • Mauritius emerged as the preferred route to channel foreign money into India largely owing to the double taxation avoidance treaty between the two countries.
  • Under this, capital gains are taxed only in the ‘country of residence’, and since Mauritius does not tax gains on investment income, the moneybags got away lightly.
  • However recently, FDI equity flows routed through Mauritius declined sharply due to amended DTAA (double tax avoidance agreement).
  • The DTAA provided for a capital gains tax exemption to resident entities of these countries on transfer of Indian securities.
  • These agreements were amended in 2016 with the purpose of source-based taxation of capital gains on shares, preventing round tripping of funds, curbing revenue loss and preventing double non-taxation.
  • After the DTAA amendment, India gets taxation rights on capital gains arising from alienation of shares acquired on or after April 1, 2017, in a company resident in India.
• General Anti-Avoidance Rule (GAAR) in April 2017.
  • Aimed to plug tax avoidance. Under these rules, Indian I-T authorities can take a closer look at ‘brass-plate companies’ that have been set up in offshore centers solely to evade tax.

Global FDI trend:

• As per United Nations Conference on Trade and Development (UNCTAD) estimates, global FDI flows fell by 41 per cent in H12018.
• This fall is attributed, to large repatriations of retained earnings by US-based parent companies from their affiliates abroad.
• This is evident in the aftermath of the enactment of the US tax reform package at the end of 2017 which gave multinationals a one-time special rate of 15.5 per cent instead of 35 per cent rate on the repatriation of profits earned abroad.