Singapore, Mauritius fight for relevance after DTAA amendments in 2016

By On September 28, 2018

Singapore, Mauritius fight for relevance after DTAA amendments in 2016

Singapore, Mauritius fight for relevance after DTAA amendments in 2016By Sachin Dave, ET Bureau|Sep 28, 2018, 11.38 PM IST

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The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) have been attempting to tighten regulations over the years .
Two years after India renegotiated its double taxation avoidance agreements (DTAAs) with Singapore and Mauritius, the two face the possibility of their importance as investment channels to the country fading. Both are looking to stave off that prospect but one is likely to be more successful in that endeavour.
Singapore and Mauritius, which have long been among the top destinations for routing investments into India, are struggling to stay relev ant in the aftermath of the tax treaty amendments in 2016 that nullified a unique arbitrage opportunity for investors. ET spoke to fund managers, tax experts, investors and officials based in Singapore and India to determine the longterm impact of the changes.
Foreign portfolio investors (FPIs) and private equity (PE) funds that once used the two jurisdictions to pool money might as well invest directly in India, given that longterm capital gains tax (LTCG) is now applicable at 10%. Some funds have already moved to Europe, as LTCG doesn’t apply on funds invested through Netherlands and France, said the people cited above. Others are looking to shift after the investment cycle ends in the next few years, insiders said. KKR, Blackstone, Brookfield, Multiples, Bain and Apollo have evaluated their tax structures, according to people with knowledge of the matter.
Some may move to Singapore from Mauritius as the former is looking to introduce regulations that could help funds better structure their pooling vehicles. Tax experts said Singapore may have an edge over Mauritius because of better infrastructure. “Unlike earlier, it’s not just about tax arbitrage. Many companies, investors and funds including PE or FPIs would prefer to set up a base in Singapore against, say, Mauritius,” said Rohan Solapurkar, partner, Deloitte Singapore. “Since Singapore is a financial hub, it has outstanding banking facilities and easier access to funds/financial products, great regulators and more accessibility to talent... thereby creating a stronger substance here.”
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Funds or investment companies need to establish that they have a significance presence in a jurisdictionâ€" ‘substance’ in tax parlanceâ€" and are not merely using it as a tax dodge. If a pooling vehicle is deemed to have been set up merely for tax purposes, retu rns could be taxed at up to 30% in India under the General Anti Avoidance Rule (GAAR).
In what could be a reaction to the tax treaty amendment and a changing tax environment due to regulations such as Base Erosion and Profit Shifting (BEPS), Singapore is looking to introduce a framework to make setting up pooling vehicles simpler. The Singapore Variable Capital Company would be a customised corporate structure that’s an addition to already existing ones such as companies, limited partnerships and trusts. This could help even India-focussed funds, which could look at open-ended structures that investors could enter and exit at any point.
The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) have been attempting to tighten regulations over the years to increase transparency and make it tough for roundtripping of illicit money. Experts said regulators are looking to curb so-called hot money. “Large and volatile capital flows are a big conce rn for RBI because such crossborder flows of money can impair our macroeconomic stability,” said former RBI governor D Subbarao. “As much as we need foreign capital to augment our domestic investment, we want stable, long-term flows.” Some fund managers have expressed frustration at the rule changes.
“It’s not really the regulations around taxation that’s a problem but the manner in which nothing is permanent,” said an executive at a US PE fund focussed on investing in Asia and based in Singapore. “The Indian government keeps pulling out rabbits out of the hat.” The fund has invested in a few tech companies founded by Indians on condition that their head offices move to Singapore.
“I would rather invest in Vietnam or Indonesia, as they are growing economies too,” the executive said. “Why must I invest in India?” However, the custodian of an FPI based in Singapore, said India was too big a market to ignore. “There are mainly three types of funds based in Singaporeâ€" focussed on India with Indian fund manager; funds that only invest in India; and global funds with an Indian managerâ€"and the impact of the tax treaties is different for everyone,” he said. “It’s tough to ignore Indian capital markets. There are few growing and transparent stock markets in this part of the world.”
(Sachin Dave is currently a fellow of the Asia Journalism Fellowship 2018 programme)
Read more onThe Blackstone GroupArbitragedeloitteinfrastructureDTAA amendmentsDTAA

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