India: France and the Netherlands are part those nations to benefit from changes to India’s tax rules. N Chandra Mohan reports.

France and the Netherlands are part those nations to benefit from changes to India’s tax rules. N Chandra Mohan reports.

Next India renxegotiated its tax treaties with Mauritius and Singapore, which account for one-third of foreign portfolio inflows into the country, investments in Indian securities by entities based in these havens are to incur a short-term capital gains tax of 7.5% which began April 1, 2017. The chance has shifted to jurisdictions such as France and the Netherlands, which do not tax such transactions. Indeed, additional than 50 foreign portfolio investors (FPIs), inclunding the likes of JPMorgan, Morgan Stanley and Sweden’s SKB, are relocating to these friendlier tax havens according to the Business Standard.

As India’s treaty with France provides for nil taxation, FPIs who have set up shop in Paris attract offshore investors and issue derivatives like participatory notes to those keen to invest in Indian stocks. P-notes are very popular part offshore investors as the identity of the ultimate beneficiary of such investments is not known to Indian authorities. French banks are reportedly offering P-note products with written assurances of no taxation. The large question is: how long will this chance last? It could only be a matter of time before India reviews its treaties with France and other nations.

Perhaps with such considerations in mind, US bank Citi chose to be a whistleblower on the advantages of such tax havens. Citi met with India’s finance ministry officials and apprised them of Paris’s attractiveness to world banks and their FPI arms to escape taxation on their Indian investments, according to the Economic Times. For its part, Citi is not issuing P-notes and selling Indian equity from Paris as it is against the spirit of regulations. Most of the entities doing so, however, satisfy the requirement of having “commercial substance” in terms of employees, permanent establishment and infrastructure to enjoy treaty benefits as per India’s General Anti-Tax Avoidance Rules, which kicked in from April 2017.

Unfortunately, there is no data available on how significant this relocation of investment vehicles is in terms of foreign portfolio inflows. The Mauritius and Singapore route will not shut down instantly. But significant investments are likely to flow in from France and the Netherlands from April. Although France and the Netherlands currently account for only a small fraction of foreign portfolio inflows into India, this could any minute at this time change.