|
|
|
Rajendra Nayak |
Aastha Jain |
The Indian Tax Law (ITL) provides a toolbox of measures to discourage transactions with entities in non-cooperative tax jurisdictions which do not exchange information with India. It empowers the government of India (GoI) to specify any country or territory outside India as a notified jurisdictional area (NJA) having regard to lack of effective exchange of information. Any transactions entered into by taxpayers in India with a person located in an NJA would attract adverse consequences under the ITL. India entered into a tax treaty with Cyprus in 1994 pursuant to which both the countries are under an obligation to exchange information necessary to prevent fraud or evasion of taxes. As per the GoI, since Cyprus has not been providing information required by the Indian Tax Authorities, it is notified as an NJA with effect from November 1 2013.
As a consequence, any transaction between a taxpayer and a person located in Cyprus will be deemed to be an international transaction subject to transfer pricing provisions of the ITL and all parties to such transaction would be deemed to be associated enterprises. This entails maintenance of documentation and reporting as prescribed under the ITL. All payments made to a person in Cyprus, which are chargeable to tax in India, would attract a higher withholding tax at 30% rate. Further, to claim deduction of any payments made to person located in Cyprus, the taxpayer would need to maintain documents and furnish prescribed information to Indian tax authorities. Where any payments are made to a financial institution in Cyprus, the taxpayer is required to furnish an authorisation to Indian tax authorities to collect any requisite information from such financial institution. Any sum received or credited from a person located in Cyprus shall be deemed to be income of the taxpayer unless it satisfactorily explains the source of such funds in the hands of the payer in Cyprus or beneficial owner such funds (if it is not the payer). Further, a person located in NJA (Cyprus) is defined to include (a) a resident of NJA or (b) an entity established in NJA or (c) a permanent establishment in NJA of any person.
The notification of NJA is consistent with the global trend of introducing counter measures to deal with "non-cooperative tax jurisdictions" and strengthen tax enforcement. Cyprus is the first jurisdiction to be notified as an NJA in India. Pursuant to this, the Cyprus government has issued a press release declaring its intention to resolve the situation with the GoI and clarifying that this development does not impact the operation of the India-Cyprus tax treaty. Taxpayers having business arrangements involving Cyprus will need to review the impact of this notification on their transactions/business structures and follow the developments between the two governments on this front.
Rajendra Nayak (rajendra.nayak@in.ey.com) and Aastha Jain (aastha.jain@in.ey.com)
Ernst & Young
Tel: +91 80 4027 5275
Website: www.ey.com/india
