India and Cyprus to Renegotiate Tax Treaty

Now that loopholes in the tax treaty with Mauritius have been plugged, the Indian government is gearing up to apply the same fix to its accord with Cyprus, the Economic Times reports.

“Talks to amend the double taxation avoidance treaty are at an advanced stage and the two sides will soon exchange formal proposals”, a government official said.

"Talks are on...With Mauritius tax treaty done, Cyprus talks would move swiftly now," said the official, marking a deeper engagement on the issue after India took the harsh step of declaring the island state a non-cooperative jurisdiction in November 2013.

Cyprus ranks seventh in terms of foreign direct investment flows into India. The 20-year-old treaty offers benefits such as capital gains tax exemption and zero withholding tax on dividends to residents.

It also offers a lower tax rate of 10% on income from interest, royalties and fees for technical services. India has been trying to renegotiate the treaty with the European tax haven for many years as it has been with Mauritius.

Cyprus has been reluctant, citing capital gains tax exemption in the treaties that India has with Mauritius and Singapore. With the Mauritius treaty being tightened, India has been able to make a stronger case for renegotiations with Cyprus.

According to the Economic Times, the template for the amendment is likely to be the same as that of the Mauritius treaty. Concerns about round-tripping of Indian funds and treaty shopping have fuelled India's resolve to opt for corrective measures in its tax treaties.

India and Mauritius announced a protocol to amend their tax treaty on May 10, restoring India's right to tax capital gains. The accord with Singapore will also be revamped as the capital gains tax benefit in that agreement is linked to provisions in India-Mauritius double taxation avoidance convention.

The naming of Cyprus as a noncooperative jurisdiction stemmed from a row over sharing information related to Indian account holders. The Mediterranean island was the first tax jurisdiction to be labelled thus by India, leading to a 30% withholding tax on all payments made to Cyprus and Indian entities receiving funds from there having to make additional disclosures, including the source of the money.

Indian entities with investments from Cyprus also have to forego deductions on account of expenditure and allowances.

The non-cooperation tag prompted Cyprus to relent on sharing of information but it had resisted amending the tax treaty because of other such accords, as mentioned above.

The Narendra Modi government resolved to put in place a stringent framework to deal with black money soon after taking over in May 2014, in line with election pledges.

It has since unveiled a series of measures including the setting up of a special investigation team on black money and a new law to deal with undisclosed overseas assets, besides reworking benami legislation.

Amending the bilateral tax treaties is seen as another step forward in that direction as it helps tackle opaque structures created to gain undue tax benefits.

Tax experts said the treaty should be amended to provide certainty to investors.

"While Cyprus-based funds continue to enjoy capital gains tax exemption in India, they would have to deal with the adverse perception around the blacklisting of Cyprus by India as well as the potential impact of GAAR (general anti-avoidance rules)," said Rajesh H Gandhi, partner, tax, Deloitte Haskins & Sells LLP.

"The government might therefore want to get its treaty with Cyprus amended so that there is more certainty for Cyprus funds and ensure that there is parity in tax treatment with Mauritius and Singapore."

Source: Gold News

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