Mauritius is in talks to review a tax treaty that has made this island of just 1.3 million people the biggest single source of foreign direct investment in India, a nation of 1.3 billion people, the finance minister said on Wednesday.
The Double Taxation Avoidance treaty, signed in 1983, has been a cornerstone of Mauritius' rise as a financial centre and its diversification away from the Indian Ocean island's traditional businesses, such as sugar cane growing and tourism.
But the deal's terms have been a growing irritant to India, which says a chunk of the funds are not real foreign investment but Indians routing cash through the island to avoid Indian taxes, a practice known as "round tripping".
"There are talks now on the review of the treaty," Seetanah Lutchmeenaraidoo, finance minister of Mauritius told Reuters in his first interview since his appointment to a new government after a December election. "We haven't finalised anything yet."
He did not give a timeline for a deal but said a main issue was to ensure a firm investing in India spent, or "added value", in Mauritius of at least 1.5 million Mauritius rupees ($42,300) a year before enjoying zero capital gains tax in Mauritius.
New Delhi wants to ensure firms in Mauritius that invest in India are not just "shell" companies comprising little more than post office boxes, and instead have substantial operations in the island, such as paying staff there, before qualifying for treaty terms that mean they avoid paying Indian capital gains tax.
Such a requirement would mirror a clause in a similar treaty India has with Singapore, another major investment route.
In fiscal 2014-15, foreign direct investment (FDI) to India was $24.7 billion, with about 24 per cent from Mauritius, the biggest single FDI source, and Singapore accounting for 21 per cent, Reserve Bank of India provisional figures show. Mauritius accounted for 44 per cent of FDI in 2012-13.
India's concern touches on a broader international debate on how to stop firms using "tax havens", or centres boasting low taxes and a network of international treaties, solely to avoid higher taxes in countries where they invest.
Mauritius has long insisted it ensures transparency and only lets firms with offices, employees and other operations on the island access treaties with African states and elsewhere. But critics still accuse Mauritius of not doing enough.
The minister said Mauritius was clamping down on firms using "loopholes" to avoid taxes.
"We hope we have stopped it," he said, adding that the regulator, the Financial Services Commission, was "ensuring to the maximum that round tripping be stopped."
Prime Minister Narendra Modi discussed the treaty on a visit this year to Mauritius.
The Paris-based OECD, an agency which offers policy advice primarily to the wealthy countries that fund it, has pushed for more transparency in low-tax environments. Mauritius officials have long said they have implemented recommendations.
"The OECD is right to say that the ... 'tax haven' days are numbered," Lutchmeenaraidoo said. "My message for the offshore sector here is: they have to move from a tax haven to a typical transparent financial sector. This is what is happening now."
This week, the OECD announced steps to be discussed at a meeting on Thursday of ministers from the Group of 20 industrialised nations to plug gaps that let firms shift profits to low or no tax areas where little or no activity takes place.