India Singapore and Mauritius: Tax Treaty Shopping and FDI Flows

Abstract

The aim of the paper is to study the extent to which tax treaties like DTAA and rules like GAAR and Limitation of Benefits clause can impact FDI flows in India from tax havens like Mauritius and Singapore and draw a logical and rational conclusion using both qualitative and quantitative analysis. The secondary research explains why India introduced GAAR and advocated amendment of tax treaties in the past two years and also why it is still deferring the introduction of GAAR. It also suggests that if India continues with the original DTAA with countries like Mauritius and Singapore which hold the tax haven status it will have to give up on its tax revenues however if it brings in GAAR it will have to give up on the foreign direct investment flows from these countries. Hence both tax revenues and foreign direct investment inflows contradict each other. Secondly using the statistical analysis to run Regression on FDI inflows from Mauritius and Singapore from 1996 to 2014 helped in establishing its relationship with the corporate tax rates of the host country and home country. Statistically, in case of Mauritius neither the corporate top tax rates nor the GDP of India or the Trade Openness between the two had any effect on the FDI inflows however in case of Singapore only GDP of India had a significant effect on the FDI inflows.