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Tax information: Cyprus accepts India’s condition

India and Cyprus are negotiating changes to their double taxation avoidance agreement (DTAA), with India insisting on the inclusion of a limitation of benefit (LOB) clause—an issue on which there has been no agreement so far, Mint reported on 15 September. Photo: Mint
India and Cyprus are negotiating changes to their double taxation avoidance agreement (DTAA), with India insisting on the inclusion of a limitation of benefit (LOB) clause—an issue on which there has been no agreement so far, Mint reported on 15 September. Photo: Mint

Cyprus has accepted a key condition put forward by India on effective exchange of information on tax avoiders

Cyprus has accepted a key condition put forward by India on effective exchange of information on tax avoiders, hoping its move, which comes amid continuing talks on amending their mutual tax treaty, will persuade India to “rescind the classification of Cyprus as a notified jurisdiction".

Cyprus informed New Delhi a few days ago that it ratified the Council of Europe-OECD (Organisation for Economic Cooperation and Development) Multilateral Convention on Administrative Assistance in Tax matters on 5 September, said Maria Michail, the Cypriot high commissioner to India.

“We have by now addressed all the Indian government’s conditions and concerns on the matter of effective exchange of information and we anticipate that the Indian government will now rescind the classification of Cyprus as a notified jurisdiction, with retrospective effect from November 1, 2013, as agreed."

There has been no response to an email sent to the Central Board of Direct Taxes spokesperson on 16 September seeking comment.

However, there is another potential sticking point.

India and Cyprus are negotiating changes to their double taxation avoidance agreement (DTAA), with India insisting on the inclusion of a limitation of benefit (LOB) clause—an issue on which there has been no agreement so far, Mint reported on 15 September.

Michail said her government invited the Indian government a few months back to visit Cyprus for another round of talks for finalizing the DTAA. “As far as the revision of the existing bilateral double taxation avoidance agreement is concerned, we are hopeful that the Indian government will soon send a delegation to Cyprus for another, and hopefully the final, round of talks to resolve the pending issues and finalize the revision, in a mutually beneficial way."

India is insisting on the inclusion of the LOB clause to prevent investors misusing the treaty to avoid paying taxes in India.

The clause seeks to limit the benefits from the tax treaty to only genuine companies that are resident in Cyprus and have a significant presence in the country. It could be in the form of a monetary threshold—like the one in the India-Singapore treaty that says that only those companies that spend a minimum of $200,000 in Singapore can avail treaty benefits, or in any other form such as stipulations on infrastructure, staffing or listing on stock exchanges.

Cyprus is one of the key destination through which funds are routed into India. It is used by countries in Europe and the US to invest in India, benefiting from the advantageous treaty between both countries. The current treaty provides for zero percent capital gains tax and a low withholding tax rate of 10% on interest payments made to entities based in Cyprus.

But India, keen to move on tax avoidance and black money, declared Cyprus a notified jurisdiction in November last year saying the European nation had failed to share adequate information on tax avoiders. As a result, business transaction with entities based in Cyprus came under increased scrutiny of the income tax department.

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.

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.

In addition, 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 that person. 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.

“In case steps taken by Cyprus facilitate effective exchange of information requisitioned by India, only then will there be a cause to de-notify Cyprus as notified jurisdictional area under section 94A," said Sunil Jain, a partner at J Sagar Associates, a law firm.

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