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India notifies Cyprus as a Notified Jurisdictional Area (“NJA”)

Global tax wars : India strikes on Cyprus

[dropcap style=”simple”]A [/dropcap]by-product of the globalised way of doing business, complex tax structures involving use of multiple low tax jurisdictions and supposed tax dodging by multinational corporations are increasingly coming under scrutiny from governments across the world. Loss of tax revenues has led to much debate and is the topic of ongoing discussions between various group of countries. The BEPS situation is just one of the many facets to this complex situation.  Since the global economy isn’t really looking peachy, governments are showing an increasing willingness to fight for tax dollars across the world. India has not been a shy spectator, having enacted anti avoidance legislation which comes into effect from 2016, but it may have just fired the first missile in this global tax war. [pullquote align=”right”]Indian tax laws were recently revised to provide our taxmen with a “tool box of countermeasures” to check evasion and to ensure adequate exchange of information[/pullquote]

Indian tax laws were recently revised to provide our taxmen with a “tool box of countermeasures”  to check evasion and to ensure adequate exchange of information . Making full use of such countermeasures, India has gone ahead and unilaterally notified Cyprus as a “Notified Jurisdictional Area” (NJA), in simple words, it has branded the small island country as an un-cooperative tax haven.   The Indian government alleges that Cyprus has been less than forthcoming with respect to providing the Indian tax authorities with information that they require to check the evasion of taxes. Cyprus has been the so far the first country to receive this honour from India.

Impact

As per section 94A of the income tax act, The supposed tool box of countermeasures, which empowers the government of India to notify jurisdictions as NJAs, all transactions with any person in such NJA shall come under greater scrutiny and shall be subject to the following measures :

  1. All transactions with entities based in Cyprus shall be subject to transfer pricing regulations, including maintenance of documentation. this is contrast to the regular state of affairs where such regulations are required to be followed only if the parties to any such transactions are “associated enterprises”, that is entities with share-holding in, or influence on another. Such additional requirements shall cause an increase in the cost of compliance for companies choosing to do business through Cyprus.
  2. No tax deduction shall be allowed to Indian businesses for payments made to any financial institution in Cyprus, unless an authorisation for furnishing of relevant information from the institution is furnished by the tax payer.
  3. No tax deduction for expenses incurred through transactions with person located in Cyprus unless the Indian tax payer provides information as required by the Indian tax authorities. This is in effect the Indian government stating that if Cyprus does not provide, we shall still get as much information as we can. Taxpayers will have no option but to comply or route their businesses through alternative jurisdictions.
  4. Any sums of money, including debt or equity inflow, shall be considered income of the Indian tax payer unless details of the source of such money in the hands of the lender/investor are provided to the Indian government. This could potentially lead to foreign investments being classified as income, and taxed as such, in the hands of the Indian company receiving investment unless adequate disclosures were made to the satisfaction of the tax authorities. This measure alone could very well stem the use of Cyprus as a intermediate jurisdiction for investment into India
  5. Lastly, any payment made to a person located in Cyprus shall be liable for withholding tax the higher of 30 per cent or a rate prescribed in Act. Further, the Cyprus based entities will also have to file a return of income in India to claim such amounts as refunds making it arduous and administratively more difficult to engage in transactions with Cyprus.

[pullquote]Cyprus has been the source of roughly 7.14 billion dollars worth of foreign investment into India during the period 2000-2013[/pullquote]It is important to note that Cyprus has been the source of roughly 7.14 billion dollars worth of foreign investment into India during the period 2000-2013. This sum is about 3.54% of all of foreign direct investment received by India in the past thirteen years.  This move clearly makes Cyprus a much less attractive route for investment into India. Further, Existing investors are going to be negatively impacted by the increased scrutiny and documentation that the NJA tag enforces upon them. Civil society and NGOs across the developed world have been arguing for greater transparency from low tax jurisdictions and Cyprus is no stranger to such demands, having seen action from other economies before India, but not on this scale.

What’s next?

On its part the Cypriot government has agreed for direct consultation and review of the double tax avoidance agreement (DTAA) between the two countries to incorporate a limitation of benefits (LOB) clause that seeks to prevent tax evasion though shell companies based out if low tax jurisdictions. The ultimate aim of this move is to also potentially coerce other tax havens into complying. Mauritius which accounts of a much larger share of investments into India  (37.57%) has already been on guard given the recent tax controversies involving investments emanating from its territory. The Indian government could very well use these actions as a bargaining chip to ensure similar LOB clauses are effected in the India-Mauritius DTAA. Clearly, there are chapters in this story that are yet to be written.

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