In a first instance of its kind, India has classified Cyprus as a non cooperative tax jurisdiction, and the move has evoked mixed responses. Finance Act 2011 introduced a â€œtoolboxâ€ through section 94A in the Income Tax Act, 1961, for transactions with entities in non cooperative countries. This was meant as an anti avoidance measures to discourage transaction with a jurisdiction that does not exchange information with India and to empower the Central Government to blacklist or specify a country as a Notified Jurisdictional Area (NJA) if it did not cooperate on information exchange.
India and Cyprus had entered into a tax treaty in 1994, and are obliged to exchange information. On November 1, 2013, the Indian Ministry of Finance notified Cyprus as an NJA following failed discussions to secure the desired level of cooperation from Cyprus. This has come as a surprise to some.
Subsequently, the Cyprus Ministry of Finance issued a press release on November 7, clarifying thatÂ the DTAA between two countries continue to be in force. It is also clarified that Cyprus desired excellent political relation with India and was making every effort to clarify/resolve the situation.
This article is basically an attempt to show thatÂ Cyprus the tax haven is falling in line.
Key Impacts of the NJA
1)Â Â Â Â Â The Central Government may, having regard to the lack of effective exchange of information with any country or territory outside India, specify by notification in the official gazette such country or territory as a notified jurisdictional area.
2)Â Â Â Â Â Transaction deemed to be associated party international transaction
3)Â Â Â Â Â Disallowance of expenditure for transaction with person in notified area
a)Â Â Â Â Â In respect of any payment made to any financial institution located in notified jurisdictional area shall be allowed under the Act unless the assessee furnishes an authorization in the prescribed form authorizing the Board or any other income tax authority acing on his behalf to seek relevant information from the said financial institution on behalf of such assessee.
4)Â Â Â Â Â Unexplained receipts from person in notified area is deemed incme.
5)Â Â Â Â Â Notwithstanding anything contained in any other provisions of this act, where any person located in a notified jurisdictional area is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVII B, the tax shall be deducted at the highest of the following rate:-
a)Â Â Â Â Â At the rate or rates in force
b)Â Â Â Â Â At the rate specified in the relevant provisions of the Act
c)Â Â Â Â Â Â At the rate of 30 per cent.
High Withholding of Tax:-
Any payment to a person located in an NJA will attract withholding of tax of 30 percent, or the rate prescribed under the income tax act, or the rates in force, whichever is higher.
Payment to financial institution in an NJA will be allowed for tax deduction in an NJA will be allowed for tax deduction if it authorizes the CBDT or other authority to seek information from it. No tax deduction would be allowed for any other expenditure derived from a person located with a person located in an NJA in the absence of prescribed documents.
If any sum is received or credited in the books of a taxpayer in India from a person located in Cyprus, the onus is on the taxpayer to satisfactorily explain the source of the money, as otherwise it shall be deeme as taxpayerâ€™s income.
Transaction by Indian taxpayer with a person located in Cyprus will be deemed as transactions between related parties/ associated enterprises. Consequently, they would be subject to transfer pricing regulations and all related compliances.
Override of Treaty
Section 94A prescribes a higher withholding rate of 30 percent. Will treaty benefit will be available? The implication under section 94A largely override provisions of the Income Tax Acts, including DTAAs.
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