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Tax Transparency Drive: Cyprus Becomes The First Victim!

Published on Tue, Nov 12,2013 | 14:23, Updated at Tue, Nov 12 at 14:52Source : Moneycontrol.com 

By: Sanjiv Malhotra, BMR & Associates

In a rather strong and stern move India has notified Cyprus to be a jurisdiction lacking effective exchange of information.  It’s the first time since India legislated specific measures under section 94A of the Income tax Act to gather information from notified jurisdictions that a country has been identified. The genesis of such a regulation (inserted in Finance Act 2011) lies in the recent drive of the government to bring transparency to assets parked in offshore locations which otherwise Indian government was finding to lay its hands on. 

For this cause, last couple of years saw India signing exchange of information agreements with numerous countries. This was supplemented by Indian Revenue officials being posted in some of the key jurisdictions to work more efficiently with their foreign counterparts and thus being able to gather the data from the primary source itself.

The concept of exchange of information is not something new, as it finds mention in most of the double tax avoidance treaties. It is more about the recent public outrage to the general levels of corruption and tax avoidance that countries (including India) have embarked on this drive to get access to offshore financial data. One of the key projects at the global arena has been the Base Erosion and Profit Shifting initiative (generally referred as BEPS) adopted by the OECD. BEPS, though cover broader issues, essentially is about countries have access to a fair share of taxation. 

As regards Cyprus, whose image surely would have been tainted by this blacklisted (and not that it was all clean earlier), the ramifications can be serious. As a result of this notification, an Indian taxpayer entering into a transaction with a person based in Cyprus (even a third party) is required to maintain and furnish elaborate information. This is at par with what taxpayers maintain in relation to their transfer pricing compliances when dealing with other group entities. Thereon, claiming tax deduction for payments made to a person (including financial institutions) in Cyprus would also require specific disclosures. Further, such payments would be subjected to 30 percent or a higher rate of withholding taxes (as may be prescribed).

Thus, in nutshell Indian Government has imposed serious disincentives to deal with persons based out of Cyprus. This for sure would impact business dealings between the two countries. Also, companies with Cyprus-India structures, may need to go back to the drawing board.

Use of so called “tax havens” has been a menace that most of the countries around the world have been facing. Over the years, sophisticated structures have been devised to cut the tax net and generate income from what is now termed as “double non-taxation”. Such practices have had serious impact on the economic growth and general welfare of countries and place higher pressure of the tax paying community. The problem is so complex that without a strong political will, it is impossible to tackle the same. Cyprus as a country has faced similar consequences from Russia and Italy in the last decade and thus the action of the Indian Government is not shocking though may be rather delayed. But as they say better late than never!

 
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