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New Delhi: India and Cyprus moved a step closer to settling a tax dispute that led to the Mediterranean island nation being blacklisted by New Delhi.

The two countries will, in the next few weeks, finalize changes to their double taxation avoidance agreement (DTAA), including a contentious information disclosure clause in it.

Cyprus’s failure to disclose information on investments routed through it to India had led to it being blacklisted.

“Since the visit of the Cypriot team to India in November last year, the Cypriot side has been forthcoming in sharing information with its India counterpart. A team from our ministry of finance is expected to visit Cyprus in the coming days for carrying forward negotiations for finalizing the revised DTAA between the two countries," said Ravi Bangar, Indian high commissioner to Cyprus.

“The matter is being followed at the highest level in the government of Cyprus," the high commissioner added.

The settlement of the dispute will provide relief to European and US businesses that use Cyprus to channel investments into India

Once the DTAA negotiations are concluded, India can seek specific information from Cyprus on financial information of Indian residents—an effective tool to check tax evasion.

A delegation from Cyprus visited India from 26-28 November and at that time it was agreed that the provisions of the new Article 26 of the Organization of Economic Cooperation and Development’s model tax convention relating to exchange of information would be adopted in the revised DTAA.

Article 26 lays down a framework under which a country can seek information from another nation and defines the rules governing that information.

The DTAA between India and Cyprus was signed in 1994.

Cyprus became the first nation to be declared a notified jurisdiction in November last year under Section 94A of the Income Tax Act of 1961. The notification made it difficult for Indian taxpayers to claim deductions on transactions with entities based in Cyprus.The move also increased the tax outgo for such taxpayers and subjected them to enhanced reporting requirements.

It meant that if an assessee entered into a transaction with an entity in Cyprus, the latter would be treated as an associate enterprise and the deal itself as an international transaction attracting transfer pricing regulations. It also meant that 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, would be allowed.

Payments to a Cypriot entity would attract a withholding tax of 30% and receipts from Cyprus would have to be explained.

Cyprus is keen to protect its status as an attractive investment destination for companies based in Europe and the US that route their investments through the island nation to benefit from its favourable tax regime. This will happen only if the Indian government rescinds the notification and both sides agree on the changes in the DTAA.

Both sides have agreed that the classification of Cyprus as a notified jurisdictional area will be rescinded with retrospective effect from 1 November 2013, the date when the notification was first issued.

According to Indian government estimates, Cyprus is the seventh top investor in India with cumulative investments of $7.2 billion between April 2000 and December 2013.

Sunil Jain, a tax partner at J. Sagar Associates, said rescinding the notification would provide relief to companies having genuine business dealings with Cyprus and remove the current uncertainty.

“Since the notification, compliance costs for Indian companies has increased substantially. They can’t claim expenditure deduction even when they are making a payment to an independent party. Also, the highest withholding tax rate is applicable. Companies have to maintain huge documentation," he said.

remya.n@livemint.com

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