BackIndia, Cyprus to negotiate new tax pact
A new tax pact will be negotiated between the two sides, according to a statement by the Cyprus govt
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New Delhi: Cyprus has agreed to share information more proactively with India, a month after the Mediterranean island nation was declared a notified jurisdiction by India for failing to effectively exchange information with tax authorities.
A new double tax avoidance agreement (DTAA) will be negotiated between the two sides, according to a statement by the Cyprus government dated 3 December. India and Cyprus have a DTAA since 1994.
The two sides held talks between 26-28 November in New Delhi to address India’s concerns around lack of information-sharing by Cyprus. It was agreed that “provisions of the new Article 26 of the OECD model tax convention relating to exchange of information" will be adopted in the new DTAA.
Article 26 lays down a framework under which a country can seek information from another nation and the rules governing that information.
It was also agreed that the channels of communication between both sides will be improved with efforts made towards swift processing of requests.
The Cyprus statement also says that it was agreed during the talks that “once the notification of Cyprus being notified as a notified jurisdictional area under Section 94A of the Indian Income Tax Act, 1961 is rescinded, it would be done with retrospective effect from 1 November 2013, date when the notification of India was issued."
An email and call to a spokesperson of central board of direct taxes remained unanswered.
India declared Cyprus as a notified jurisdiction, a move that increased scrutiny on any business transaction with entities based in Cyprus by India’s income tax department.
The government introduced Section 94A in the Income Tax Act in 2011, empowering it to categorize a country as a “notified jurisdictional area" as part of measures to check tax avoidance.
This impacted Cyprus’s status as an attractive investment destination as several companies based in Europe and the US route their investments through the island nation to benefit from its favourable tax regime.
The notification made it difficult for taxpayers to claim deductions on transactions with entities based in Cyprus. It also subjects a taxpayer to enhanced reporting requirements and more tax outgo.
According to the notification, if an assessee enters into a transaction with an entity in Cyprus, the entity will be treated as an associate enterprise and the deal will be treated as an international transaction attracting transfer pricing regulations.
Transfer pricing is the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.
If any sum of money is received from a person located in Cyprus, the onus will be on the assessee to explain the source of the money in the hands of such person or beneficiary. Also, any payment to a Cypriot entity will attract a withholding tax of 30%.
No deduction in respect of any other expenditure or allowance arising from a transaction with a person in Cyprus, or a payment made to a financial institution, is allowed unless the assessee provides the required documents.
The reconciliation is a welcome development, according to Gautam Mehra, executive director at PwC India, a consultancy firm.
“The fact that the Indian government has agreed to rescind the notification from the date it was notified is a welcome move. But it will depend on the outcome of talks on DTAA between both the sides," Mehra said. “People who came in to invest through Cyprus did so based on a particular law. It is not fair to subject them to additional scrutiny."
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