Tackling tax-information exchange tangle

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SummaryCyprus comes on board after India notified it as a jurisdiction not providing the required information

Over the past few years, various countries, including India, have been focusing on introducing anti-avoidance measures to combat tax evasion with exchange of information across countries being one of the key tools. The scope of the information to be exchanged is provided either under the respective tax treaties or a specific Tax Information Exchange Agreement (TIEA) executed between countries/territories.

Given the ability of the tax authorities to conduct roving enquiries and request information beyond the scope agreed between nations, the OECD has been instrumental at various intervals in facilitating mutual economic cooperation on accessibility of information.

India introduced its General Anti Avoidance Rules (GAAR) in 2009 (though presently deferred) to combat tax evasion. In order to ensure a robust framework to obtain information on cross-border transactions, the Indian government manifested its intention to negotiate its tax treaties, particularly to amend and widen the scope of the exchange of information article. Independently, India has entered into TIEAs with 10 countries as of today.

It also introduced the Section 94A in the Income Tax Act, 1961), which empowers the government to notify countries/territories (notified jurisdictions) that do not effectively exchange information. The government has recently notified Cyprus as one such jurisdiction, which also happens to be the first country to get notified under these provisions.

It has wide ramifications on aspects like taxability, deductibility, reporting and compliances in respect of transactions with persons located in Cyprus.

Coverage: While the language of the Act is wide enough to cover any transaction between two non-residents (one of whom is a Cypriot entity), the memorandum explaining the provisions of the relevant Finance Bill that introduced the Section 94A states its objective is to discourage transactions by a resident assessee with persons located in notified jurisdictions.

Transfer pricing: Any transaction between an assessee and a Cypriot entity shall be deemed to be an international transaction between two associated enterprises and shall be governed by the provisions relating to transfer pricing under the Act (for example, Section 92).

Arguably, this should not impact the transactions in respect of which there is no income chargeable to income tax. For example, dividends paid by the Indian companies to Cypriot entities should not be impacted by this provision. It would be interesting to mull over cases where the income is not chargeable to tax pursuant to the India-Cyprus tax treaty.

This would also result in practical challenges to comply with the transfer pricing documentation and reporting requirements for

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