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Cyprus Surprise!

Published on Tue, Nov 12,2013 | 21:40, Updated at Wed, Nov 13 at 18:41Source : Moneycontrol.com 

By: Payaswini Upadhyay, CNBC-TV18

Cyprus’ reluctance to share information with the Indian Tax Department has made it a ‘notified jurisdictional area’!

The Indian Tax Department Finance Act, 2011 empowered the government with anti-avoidance provisions. One such provision allows the Indian government to notify any country a notified jurisdictional area’. Consequently, all transactions with such a jurisdiction are subject to stringent reporting requirements and withholding tax at the maximum tax rate.

Recently, the CBDT said that since Cyprus has not been facilitating exchange of information for taxation purposes, it has been notified as a ‘notified jurisdictional area’. CNBC-TV18’s Payaswini Upadhyay spoke to several tax experts to understand the implications of this move.

India has notified Cyprus to be a jurisdiction lacking effective exchange of information. What circumstances to your mind have led to this?

Daksha Baxi, Executive Director, Khaitan & Co.
“India has been trying to plug its tax base erosion though various meaures, including tightening the requirement for giving treaty benefits to residents of treaty countries, especially where the treaty jurisdiction is mostly used as an intermediary jurisdiction to invest through it for claiming the treaty benefit. India has been on the negotiation table with Cyprus for a number of years. In fact, the text of the revised treaty was agreed several years ago but Cyprus refused to notify it in view of the treaty benefits continuing to exist under India-Mauritius and India-Singapore treaties.  It is important to note that the provisions under India- Cyprus treaty are even better than under India- Mauritius treaty and hence the perception of the misuse of the treaty cannot be ruled out. The tightening of provisions around providing treaty benefit clearly included seeking information beyond that which is either available with Cyprus tax authorities or what they would consider they can gather. Thus, it would appear that there has been failure of adequate communication between the two competent authorities, leading to this extreme step by India.”

Punit Shah, Co-Head- Tax, KPMG India
“Apparently, it seems that the Indian Government has not got the desired level of co-operation from Cyprus for exchange of information on tax evasion. As a result, it has notified Cyprus for the purpose of Section 94A. It is not clear from the Notification as to what level of information has not been shared with the Indian Government.”

Gautam Mehra, Executive Director - Tax & Regulatory Services, PwC India
“The press release issued by the Indian tax authorities reflects that this a response to Cyprus not providing information requested by Indian tax authorities under the exchange of information provisions of the Tax Treaty between India and Cyprus. The press release by the Cyprus tax authorities also reiterates a commitment to holding direct negotiations with the aim of finalising a long pending review of the Tax Treaty.”

Aseem Chawla, Partner, MPC Legal
“Based on the press release of Finance Ministry, it can be viewed that the Cyprus Government, perhaps hasn’t been forthcoming to share information with the Indian Government, which is mandatory under the clause of Exchange of Information under the tax treaty.  To put it in perspective, the Cyprian Government commitment with the EOI has been a matter of some suspect when compared with the hectic Indian initiative at a global level.”


Have other countries in the past made such a move with regards to Cyprus or any other jurisdiction?

Daksha Baxi, Executive Director, Khaitan & Co.
“I believe yes. France has a similar provision for “tax blacklisting”. It has till date blacklisted Bermuda, Botswana, British Virgin Islands, Brunei, Guatemala, Jersey, Marshall Islands, Montserrat, Nauru and Niue. This “tax blacklisting” has effects on tax withholding, additional TP documentations, capital gains treatment etc.  I understand that  Russia had black listed Cyprus, however has removed Cyprus from the blacklist w.e.f. 1 January 2013. Also   Cyprus  has been blacklisted by a number of  other countries such as Argentina, Brazil, Australia, Italy, Mexico, Portugal, Spain.”

Punit Shah, Co-Head- Tax, KPMG India
“Cyprus is the first jurisdiction to be notified by India for lack of effective exchange of information. As a matter of fact, India has in the recent past entered into Tax Information Exchange Agreement with several tax havens such as Cayman Islands, Bahamas, BVI, Bermuda, Isle of Man etc. We are not aware if any other country has made such a move with regards to Cyprus or any other jurisdiction.”

Aseem Chawla, Partner, MPC Legal
As far as our knowledge goes, Russia did blacklist Cyprus in the past. However, Cyprus was removed from the blacklist earlier this year.  Russia and France have been known in the past to have blacklisted various ‘uncooperative’ jurisdictions.


Between April 2000- August 2013, FDI equity inflows from Cyprus amounted to $7141 mn. How will this move impact investments coming via Cyprus? Will it impact both FII and FDI investments?

Daksha Baxi, Executive Director, Khaitan & Co.
“The notification invokes provisions of section 94A, which means that the transactions with any Cyprus resident- whether FII or FDI, would require compliance with transfer pricing regulations. Even if the same is possible in case of FDI, it would pose a great deal of practical difficulties in case of FIIs, where the transactions are done on stock market and the buyer and seller may not be known at the time of entering into the trade, let alone comply with TP Regulations. The higher WHT requirement would result in severe cash flow issues for Cyprus investor. While the Cyprus resident may ultimately get the treaty benefit by satisfying all other requirements and thus get refund, it would certainly be a much longer process. It can be expected that Cyprus structures will be re-examined and it is unlikely that new investments will be made through Cyprus in the immediate future.”

Punit Shah, Co-Head- Tax, KPMG India
“The recent notification will definitely impact the investments coming via Cyprus, both FII and FDI. It would also impact existing investments from Cyprus, especially where there are lockin conditions (for example transactions in real estate sector). In light of sSection 94A, transactions with entities based in Cyprus will necessitate maintaining a lot of information and documentation. Considering the ramifications of this notification and past controversies surrounding Cyprus bailout, there will be lot of uncertainty around investments into India from Cyprus.”

Gautam Mehra, Executive Director - Tax & Regulatory Services, PwC India
“This move would typically adversely impact investments which have already come in through Cyprus, at the time when the investments realise returns  the form of interest or capital gains, in case the issue is not resolved quickly. It would impact both FII and FDI investments. There are technical arguments which could seek to protect certain types of returns flowing to Cyprus recipients; however, at a practical level, payers may tend to be conservative and would seek to withhold tax before releasing the payments. The notification however, does not seem to override the treaty and the Cyprus recipients may have the option of filing tax returns to claim a refund of taxes which may have been withheld without considering the benefit of the Tax Treaty.”

Aseem Chawla, Partner, MPC Legal
This notification ought to have an impact on the investments coming in through the FII and FDI route. It is understood that being notified under Section 94A has serious repercussions, such as, applicability of transfer pricing compliance, increased documentation requirements and a higher withholding tax rate.  It will become increasingly difficult for investment companies housed in Cyprus to sustain themselves, due to the ensuing testing conditions and economic hardship and such investments shall be subjected to. In the given environment, foreign investment inflows from Cyprus are bound to be hampered.


How will it impact Indian taxpayers dealing with Cyprus-based parties?

Daksha Baxi, Executive Director, Khaitan & Co.
“Indian taxpayers will be required to undertake significant compliances with transfer pricing regulations, reporting of transactions, face denial of tax deduction for expenses, risk being taxed on investment by Cyprus resident and require to withhold tax at 30% for payments made to Cyprus resident. All in all, it can increase the cost of doing business with Cyprus entities and further subject Indian taxpayer to scrutiny which otherwise may not be warranted.”

Punit Shah, Co-Head- Tax, KPMG India
“The implications of the Cyprus Notification are summarized as under:
- If an Indian taxpayer enters into a transaction with a person in Cyprus, then all the parties to such transaction shall be treated as related parties and Transfer Pricing (TP) provisions will apply.
- No deduction shall be allowed in respect of any payment made to any financial institution in Cyprus unless the taxpayer furnishes an authorization that would empower the Indian government to seek relevant information from such financial institution.
- No deduction shall be allowed in respect of any other expenditure or allowance arising from the transaction with a person located in Cyprus unless the taxpayer maintains and furnishes the prescribed information to the tax authorities. This would be over and above the TP documentation.
- Where any sum is received from a person located in Cyprus, then the onus is on the taxpayer to satisfactorily explain the source of such money in the hands of such person or in the hands of the beneficial owner. In case it fails to do so, the amount so received shall be deemed be its income.
- Any payment made to a Cyprus person shall be liable for withholding tax at 30 per cent or a rate prescribed in Income tax Act, whichever is higher.”

Gautam Mehra, Executive Director - Tax & Regulatory Services, PwC India
“Indian taxpayers dealing with Cyprus based parties would have to take into account the notification issued at the time of making payments. There would be additional compliance and documentation requirements arising out of the deemed applicability of transfer pricing provisions as well. Those receiving income from Cyprus based parties would be impacted as well.”

Aseem Chawla, Partner, MPC Legal
Perhaps, the greatest ramification would be the application of transfer pricing provisions to transactions with Cyprian entities, especially, during the time when transfer pricing litigation is on the rise. Also, Indian tax payers will run a risk of disallowance where adequate information with regard to transactions with Cyprian entities is not made available to the Indian tax authorities. Moreover, a greater degree of scrutiny has to be shouldered by an Indian tax payer who has received any sum from a Cyprian entity, to explain the source, veracity etc. thereof.

 


 

 
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