Beating Mauritius
Business Today|March 07, 2021
FDI surge from Cayman Islands makes it the new Mauritius; chorus grows China might be routing investments into India through it
DIPAK MONDAL

Cayman Islands is situated in Caribbean Sea, 480 miles southwest of Miami, USA. The three islands are spread over 101 square miles, have a population of 65,000 and gross domestic product (GDP) of $5.5 billion, slightly more than that of the Union Territory of Puducherry.

Still, it was the third-largest contributor of equity foreign direct investment (FDI) in India in the first six months of FY21 ($2 billion). Only Singapore ($8.3 billion) and the US ($7.13 billion) were ahead. The tiny British Overseas Territory even bettered Mauritius, traditionally the biggest source of FDI into India.

The emergence of Cayman Islands as India’s biggest FDI source is not a one-off event triggered by the Covid-19 pandemic. The trend had been taking shape for the last two-three years, but became more visible only in FY20 when the island became the fifth-largest source of FDI ($3.7 billion). It had entered the top 10 (sixth rank) only in FY18. While it topped countries such as France, Germany, the UK and Japan in the last three years, if trends for the current financial year hold, it may outflank Mauritius, traditionally the number one FDI source, in FY21.

Why is a country half the size of Puducherry emerging as one of India’s biggest FDI contributors? Is it the new Mauritius — a typical no-tax, low-compliance jurisdiction, which investors take advantage of to route ill-gotten money into India? Or is there more to it than meets the eye — a China connection, may be?

Tax Arbitrage

The rise of Cayman Islands went parallel with both Mauritius and Singapore losing their tax advantages after India modified its tax treaties with these two countries. The new IndiaMauritius and India-Singapore tax treaties that came into force from April 1, 2017 took away some of the tax advantages of routing investments through these jurisdictions. Cayman Islands, on the other hand, does not have a tax treaty with India but only a Tax Information Exchange Agreement, signed in 2011. This could have meant double taxation for investors but for the fact that Cayman Islands does not impose income, corporate, capital gains or other direct taxes such as payroll and withholding taxes. According to the The Organisation for Economic Co-operation and Development (OECD), Cayman Islands has had tax treaties with just 10 countries, of which only eight were in force in the first half of 2020. So, is it gaining at the cost of Mauritius and Singapore?

Amit Jindal, Co-founder of chartered accountancy firm Felix Advisory, says Cayman’s no-tax territory status is a big reason for investors shifting there. “Unlike most countries, Cayman doesn’t have corporate tax, making it an ideal place for multinational corporations to base subsidiary entities to shield some or all of their income from taxation,” he says.

Akhilesh Ranjan, former member of the Central Board of Direct Taxes (CBDT), who was also in charge of the administration of international taxation and transfer pricing in India, says there was a shift from Mauritius to Singapore after the amendment in the Mauritius treaty. “Though both the treaties were amended at the same time, Singapore already had a Limitation of Benefits clause, which specified some objective parameters. So, there was an element of certainty in Singapore, which was not there in Mauritius, which is why substantial investments shifted from Mauritius to Singapore,” he says. However, he refuses to say that the surge in FDI from Cayman Islands is only due to low tax rates there. “There are no clearly identifiable reasons. Of course, it is a low-tax jurisdiction, but so are others,” he says.

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