India Reviewing Cyprus Tax Treaty to Reduce Withholding Tax Issues

June 18, 2014 Posted by India Briefing Reading Time: 4 minutes

DELHI – After classifying Cyprus as a “notified jurisdiction” last November and suspending double taxation avoidance agreement (DTAA) benefits, India may soon revise its DTAA with Cyprus and restore a 10 percent withholding tax rate in light of recent progress in tax information sharing.

Since the two countries signed a DTAA in 1994, the small island jurisdiction has become the seventh largest source of FDI into India – accounting for US$7.44 billion in FDI between 2000 and 2014, and US$557 million in FY2014 alone.

Alongside the suspension of DTAA benefits under Section 94A of the Income Tax Act, India began levying a 30 percent withholding tax on all payments made to Cyprus (up from 10 percent under the DTAA) and now requires Indian entities receiving funds from the jurisdiction to disclose the exact source of payment.

“Cyprus has been requesting to be put off the notified jurisdictional area list on the grounds that it has started sharing information with India now. Though the information on specific requests by Indian tax authorities has started flowing in, a decision on taking it off the list would happen only when there is a specific commitment from them,” an Indian government source said earlier this month.

India’s decision to suspend its DTAA with Cyprus last November stemmed from concerns over a lack of information sharing on tax evaders. Since taking office, Modi’s administration has declared a crackdown on undeclared income in tax havens, or “black money,” to be a policy priority and constituted a special investigative team (SIT) on the issue during its first official cabinet meeting in May.

“We don’t want black money in Cyprus, we want legitimate money. We are willing to work with the SIT on black money and will take up the issue with the new government,” high commissioner of Cyprus, Maria Michail, said on the matter.

Under India’s classification of Cyprus as a notified jurisdictional area, a number of provisions apply to financial transactions between the two nations, including:

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)]

If Cyprus is serious about maintaining its status as a competitive jurisdiction for routing FDI into India, rapid steps must be taken to strengthen tax information sharing efforts with Indian authorities.

Recent progress to enable the automatic exchange of tax-related information between tax authorities in India and Mauritius has sought to preserve Mauritius’ status as a leading source of FDI after Singapore overtook the country as the leading source of FDI into India last year.

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