India To Revamp Tax Treaty With Cyprus
India is said to be seeking a revision to its 1994 double tax agreement with Cyprus before the territory can be declassified as a notified jurisdictional area.
In November of last year, the Indian Government invoked powers under Section 94A of the Indian Income Tax Act (ITA) 1961 to levy a 30 percent withholding tax on payments to persons located in Cyprus. This was after the Indian Government had classified Cyprus as a non-cooperative jurisdiction due to its failure to provide tax information requested by the Indian tax authorities.
Under these provisions:
- If an assessee enters into a transaction with a person in Cyprus, then all the parties to the transaction will be treated as associated enterprises and the transaction will be treated as an international transaction resulting in application of transfer-pricing regulations including maintenance of documentation (Section 94A(2)).
- No deduction in respect of any payment made to any financial institution in Cyprus will be allowed unless the assessee furnishes an authorization allowing for the seeking of relevant information from the said financial institution (Section 94A(3)(a), and Rule 21AC, and Form 10FC).
- No deduction in respect of any other expenditure or allowance arising from the transaction with a person located in Cyprus will be allowed unless the assessee maintains and furnishes the prescribed information (Section 94A(3)(b), and Rule 21AC).
- If any sum is received from a person located in Cyprus, then the onus is on the assessee to satisfactorily explain the source of such money in the hands of such person or in the hands of the beneficial owner, and in case of his failure to do so, the amount will be deemed to be the income of the assessee [Section 94A(4)].
- Any payment made to a person located in Cyprus will be liable for withholding tax at 30 percent, or a rate prescribed in the Act, whichever is greater [Section 94A(5)].
India and Cyprus entered into a DTA on December 21, 1994. Under the DTA, both countries have a legal obligation to exchange such information as is necessary for carrying out the provisions of the agreement, in particular for the prevention of fraud or evasion of taxes.
Despite recent efforts by Cyprus to share the required tax information with India, India will reportedly require a greater commitment from Cyprus to share tax information set out in new double tax treaty provisions, which according to Cypriot news reports, could be in place by September.
The development comes alongside the Indian Government’s decision to set up a special investigation team to use tax information exchange requests to track down untaxed income in overseas accounts linked to Indian taxpayers.