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Why Switzerland Is Being Nice & Cyprus Acting Pricey!

Published on Tue, Oct 28,2014 | 16:47, Updated at Fri, Oct 31 at 21:14Source : |   Watch Video :

At the 68th Congress of The International Fiscal Association in Mumbai, CNBC-TV18’s Payaswini Upadhyay spoke to Monica Bhatia, Head-Secretariat of the Global Forum on Transparency and Exchange of Information for Tax Purposes, OECD on the EU agreement on automatic tax information exchange; on Switzerland’s efforts to seem forthcoming to share information with India and if Cyprus will concede to India’s information requests.  

Upadhyay: We saw an announcement by the G20 who have committed to automatic exchange of information by 2017. What does this mean?

Bhatia: G20 leaders in 2013 in Saint Petersburg at their summit had announced that they would be doing automatic exchange of information and they asked the OECD to work with G20 countries to develop what they call a standard which would be applicable worldwide to all countries. They also called on financial centres to also commit to this new standard. So, over this year in 2014 OECD working with G20 countries actually developed that common reporting standard what it is called, endorsed it and they also announced that they will start exchanging information automatically by 2017 or by 2018. They called on other financial centres to actually also implement this new standard.

Upadhyay: Dejargonise this a little bit for me. This automatic exchange of information what does it mean? Today specific requests were being made that here is Mr X and I think that there is something that he is hiding so XYZ bank can you give me his information. Now will this XYZ bank come to me and I won't have to go fetching for information. Does automatic exchange of information mean that?  

Upadhyay: Yes; you are very right. Automatic exchange has been happening amongst countries even before in different kinds of income. In the European Union, it is the savings income which is called the interest income, they have been exchanging that automatically. Sometimes governments just send CDs to their counterparts saying I found this information about residents of your country and I think these people are taxable in your country. So, that has been happening sporadically.

Also as you mentioned there is exchange of information or request which has been going on where in the case of a specific tax payer a government would ask the other government to get that information because that particular tax payer may be under investigation and ask for specific information to be provided. Now what is going to happen is that the banks and financial institutions are required to look through their account holders and identify account holders which are residents of other countries and with whom this country has a treaty. They will identify these account holders, collect information which includes account balance, which includes income coming into that account including interests, dividends, any insurance proceeds etc- they will collect that information, they will segregate it based on country and provide that information to their own government. That government will then separate it based on different countries and pass it along to the other country. That country will receive the information, it will look at its own return filing processes, try to match that information or they will use it for risk assessment or identifying risky cases to investigate and audit further. So the information is coming automatically on an annual basis and it is coming in a standardised format without making any requests.

Upadhyay: Apparently India has made this big breakthrough with Switzerland which the media has been sort of headlining over the past 48 hours. What is it that we have achieved in this process and the millions and millions of dollars apparently that is in black money that has been hiding or being stashed away in Switzerland – the breakthrough - does it mean anything to the process of bringing that black money back to India?  

Bhatia: Switzerland has recently announced that it will also start exchanging information automatically starting from 2018. It has also given its priority negotiations; that it will negotiate with the EU and with countries with whom they have trade relations or economic relations and also countries which may have what they call regularisation procedures which probably means amnesty. In that context I understand that India has been talking to Switzerland and saying that we should also be on the priority or we should do an agreement quickly.

From what I read in the media, there is some forward movement there which seems that there are positive talks that there would probably be talking about an agreement with each other soon. Of course that means that India would, if once this agreement is done and information starts flowing in, it obviously means that people who were hiding money in Switzerland should not be doing so if they are still doing. I think in all it is a very positive development.

Upadhyay: Will this apply to retrospective income or funds that have already been parked in Switzerland?  

Bhatia: What I would say is that the standard requires the country, for example, Switzerland will identify the accounts in its banks on a particular date, may be say for example in 2017 or January 1 of a particular year, it will look through- the banks and financial institutions - will look through the accounts and they will look to see which accounts relate to country A,B,C,D including India and then they will segregate it and provide it. In that sense it is accounts on a particular date. They are not obliged to go back 10 years and start digging for details of the past.

Upadhyay: So if my money is stashed in Switzerland, I have time till 2017 to get it back or get it out of Switzerland?

Bhatia: For all you know India might already be requesting information about existing accounts.

Upadhyay: Apparently we weren’t getting it, is that so?

Bhatia: I think what they were not getting was with regards to a certain category of cases. I also understand from the news reports that there have been some talks regarding that and some progress regarding that.

Upadhyay: What is the category of cases, what do you mean by that?

Bhatia: I think the cases that were being talked or discussed were some cases about account holders where a CD was stolen from a bank by a particular employee. I think there were difficulties with that regard.

Upadhyay:: India has signed over the past several years a lot of tax information exchange agreements. Help me with a before and after picture. Is it sort of linked into this grand plan of getting everybody to exchange information automatically and where does that fit in with India's agreements that we have been signing with countries?  

Bhatia: One can exchange information with different countries and jurisdictions either through a Double Taxation Avoidance Agreement or through what is called as Specific Tax Information Exchange Agreement or what is a Multilateral Mutual Administrative Assistance Agreement. So, there is a multilateral instrument, there is a bilateral instrument only for exchange and there is a bilateral DTAA which contains an article for exchanging information.

So, where India has had Double Taxation Avoidance Agreements, it is able to exchange information under that. With certain countries, we don’t have tax systems or don’t have taxation on their own or smaller financial centres they have been doing tax information exchange agreements where it provides for exchanging information. So, what all this does is that it enables India to ask for information. India has been expanding its network of exchange relationships which enables India to get that information, ask for that information. In the past, it wasn’t possible because there were no agreements in place to do that, there was no legal framework. Now there is a legal framework to do that. As far as how it fits into With Automatic Exchange of Information is concerned, some of these agreements including the Double Taxation Avoidance Agreements and The Multilateral Agreement they also provide for automatic exchange of information. So, as India has these agreements in place, automatically India will have a legal basis to do so.  

There are some steps to be taken to operationalize that including signing a competent authority agreement and then doing some procedures to ensure confidentiality of information and that is when the actual switch for exchanges starts.

Upadhyay:: We have a existing treaty with Cyprus. Cyprus was again in news- I think for the first time India notified a jurisdiction as a jurisdiction which was not willing to share information. What did we not have in those agreements with some of these jurisdictions like Cyprus that we are trying to renegotiate that now?

Bhatia: With Cyprus, India did have an agreement which had a clause for exchanging information. India, as I understand, made requests and Cyprus was not able to effectively exchange information under that agreement. So, this was the case with Cyprus and some other countries as well. Based on the input that we got from different peers, Cyprus was evaluated in its peer review as being non-compliant with the standard. So a recommendation was made, many recommendations have been made to Cyprus to fix either their laws or their practises to make sure whoever is asking for information or making valid requests should get that information.

The agreement that India is trying to renegotiate with Cyprus is probably with regards to other clauses and so that is an ongoing process. With regards to exchange of information, there was a problem with Cyprus' practices and that was identified in the report.

Upadhyay: So is Cyprus trying to fix it and what will India do until that happens?  

Bhatia: Cyprus, I understand, would expectedly be trying to fix that. All global forum members who get recommendations are expected to fix the problems that they have and then come back and report back to the global forum demonstrating what changes they have made and hopefully once those changes are made, then information will flow in a better manner.

Upadhyay: Where does this tax information exchange agreement or automatic exchange agreement process that you were doing at the OECD fit in with the base erosion and profit shifting plan- that is one. And two, what is it that we are likely to see in the next couple of years that will help India’s case in getting information from jurisdictions where apparently black money is being stashed?  

Bhatia: As far as the base erosion and profit shifting project is concerned, there is a component there about transparency. That is also bodied in the country by country reporting and also making public rulings by certain jurisdictions. So that element and component is there but that is an ongoing work that is progressing and by 2015 the whole BEPS outcome will be presented, part of which has been presented to the finance minister this year.

What the global forum is doing with exchange of information in specific is with regards to cooperation between jurisdiction and to make sure they get all the information that they need to enforce their own tax laws and if they do find that there is tax evasion going on and their own laws are being violated, they can punish the tax payers. If they find that there is no evasion going on and it is perfectly legal, then they have to look at other aspects such as base erosion and profit shifting activities and that is what they have to look at.

So, that said, this work in the exchange of information aspect what is happening is that last four or five years a lot of agreements were being done, a lot of legal infrastructure was being put in place because of the pressure from the global forum. Many countries were also investing in resources, manpower, IT systems to make sure they are able to get the information and now what we see is that the requests are actually happening. So the highway was laid out in the last four to five years. So actual movement is happening, more requests are being made, India has increased its outgoing requests, so have many other countries.  

There is a time lag between the information coming. You are using it in your investigations and taking action against it but all that is happening at a very fast pace. The highway is there, traffics have started moving and with automatic exchange of information of course there is a whole another stream of traffic that will start coming and a lot of changes will happen.

Upadhyay: This might be over simplification of the FATCA rules that US has put out -  US is expecting every other jurisdiction where its residents deal with or have business in to give them the information and this is parallel to what is happening at a global level. Is it in harmony with what the OECD is doing or this is going much beyond that?

Bhatia: The US started out with their FATCA regulations which became the catalyst for the global common reporting standard which the OECD and the G20 countries started developing after FATCA came about. In that context, there are certain differences between FATCA and the common reporting standard. Some of them are relating to the fact that FATCA is based on US citizenship and CRS or the Common Reporting Standard is based on residency. So there are some other differences. So the FATCA regime will continue to operate and this is also a parallel regime which other countries will use to exchange information. It is hoped that going forward these will converge at some point but when and how it is hard to say at the moment but the objective is to have one common standard for automatic exchange of information which means everybody has to look for the same kind of information, everybody has to look at it in the same format and exchange it in the same way so that the costs on the banks and financial institutions are very low and of course there is a level playing field that no one jurisdiction has advantage by implementing different rules than somebody else. So that is the objective and that is what we are working towards.


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