India is seeking an amendment to its 1994 double tax agreement with Cyprus before the territory can be out as a notified jurisdictional area.
From November 2013, the Indian Government raised powers under Section 94A of the Indian Income Tax Act (ITA) 1961 to levy a 30% withholding tax on payments to persons located in Cyprus. Under these provisions:
- Under Section 94A(2), If a taxpayers 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(3)(a), and Rule 21AC provides ,no deduction in respect of any payment made to any financial institution in Cyprus will be allowed unless the taxpayers furnishes an authorization allowing for the seeking of relevant information from the said financial institution and also in Form 10FC.
- Section 94A(3)(b), and Rule 21(AC) provides, 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 taxpayers maintains and furnishes the prescribed information.
India and Cyprus signed a DTAA in 1994 thus 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.
