EY Tax Alert. Executive summary

Transcription

1 5 June 2015 EY Tax Alert India joins the Multilateral Competent Authority Agreement to facilitate standardized Automatic Exchange of Information Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. The need to exchange relevant information on a bulk basis, freely and automatically, to address the problem of offshore tax evasion and avoidance has been acknowledged internationally. India, as a matter of policy and as a non-oecd G20 member and representative, is fully supportive of the various initiatives on tax transparency, including Automatic Exchange of Information (AEOI). In furtherance of this commitment, India has joined the Multilateral Competent Authority Agreement (MCAA) on AEOI on 3 June 2015 taking the total number of countries/jurisdictions agreeing to exchange information automatically in accordance with MCAA to 61. This would enable India to meet its commitment to be an early adopter" committed to exchange information automatically by the year 2017.

2 Detailed discussion Cross-border transactions have increased manifold so as to become the norm rather than an exception. Tax Authorities world over; however, find it challenging to extend their arms beyond their respective territorial jurisdictions. In this scenario AEOI comes as an effective way for countries to co-operate in cross-border matters. Initially, the international norms were to provide assistance to other countries only on satisfaction of the norms of dual criminality, i.e., in cases of drug trafficking, corruption, terrorist financing etc. which are criminal activities in both the countries. The next stage (which is as at present) is where the cooperation has extended to cases of tax evasion and avoidance and countries are obliged to exchange information requested as per provisions of tax treaties/agreements. The third stage of cooperation is the automatic exchange of financial account information without countries having to make requests for the same, thereby leading to real time exchange of information enabling the receiving country to utilize the same to verify whether such accounts indicate tax evaded money and to take necessary action. India s joining the MCAA reflects a significant progress towards this third stage of cooperation. Legal basis for Exchange of Information (EOI) India has entered into various (i) bilateral agreements such as Double Taxation Avoidance Agreement (DTAA) with 94 countries and Tax Information and Exchange Agreement (TIEA) with 17 countries [1], (ii) multilateral agreements such as OECD convention on Mutual Administrative Assistance in Tax Matters (MAAT), having 85 signatories and in force in India since 1 June 2012, and SAARC [2] limited Multilateral [1] DTAAs with 7 more countries and TIEAs with 29 jurisdictions are being negotiated [2] South Asian Association for Regional Cooperation comprises Afghanistan, Bangladesh, Bhutan, Maldives, Nepal, Pakistan, and Sri Lanka, apart from India as signatories. Agreement on Avoidance of Double Taxation And Mutual Administrative Assistance In Tax Matters (SAARC MA) that has been in force in India since 1 April These agreements form the legal framework for receiving and providing information amongst countries/ jurisdictions. Restriction of EOI on request basis Although exchange on request basis has resulted in improving tax transparency, its scope is limited since the offshore financial centers and tax havens are obliged to provide information only when the requesting State has some information already in its possession and investigation in the particular case has already commenced. This is because the prerequisite of making requests is a necessity to demonstrate foreseeable relevance of the information for administration or enforcement of domestic tax laws. It has, hence, been felt that the information on request" basis may have limited effect in identifying the financial assets hidden in offshore jurisdictions and tax havens through a complex web of entities. Automatic Exchange of Information (AEOI) AEOI, as the name suggests, means sharing of information without making a specific request. Thus, systematic and periodic transmission of "bulk" taxpayer information is sought to be achieved from the source country to the residence country through AEOI. AEOI is possible under most of the DTAAs and MAAT. Many countries, including India, have been exchanging information automatically. However, there has been no uniformity in the nature and type of information exchanged and further, there are no standards on the periodicity of exchange or on the technical solutions to be utilized for collection and transmission of information. Thus, the information exchanged automatically, has often been perceived to be of limited utility to the receiving country.

3 Global Standard on AEOI, to facilitate meaningful EOI In response to G20 s call for automatic exchange to become the new international standard for EOI, the OECD, working with non- OECD G20 countries, released the Standard for Automatic Exchange of Financial Account Information in Tax Matters (Standard) on 21 July The Standard consists of the Model Competent Authority Agreement (Model CAA), intended as a template for intergovernmental agreements, and the Common Reporting Standard (CRS) that contains the reporting and due diligence standard that underpins the AEOI. The CRS on AEOI requires the financial institutions [3] of the source jurisdiction to collect and provide information to their tax authorities about taxpayers resident in other jurisdictions, for transmission of the information on a bulk basis to the tax authorities of jurisdictions of those residents. The CRS on AEOI have been designed with a broad scope to ensure that meaningful information is exchanged automatically. The information to be transmitted includes all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income) and also includes account balances and sales proceeds from financial assets. Further, the accounts that need to be reported include accounts held by individuals and entities, including trusts and foundations, and the Standard includes a requirement to look through passive entities, such as shell companies and trusts, to report on the individuals that ultimately control these entities. The Model CAA links the CRS and the legal basis for exchange, such as DTAA or the MAAT, allowing the financial account information to be exchanged. The Model CAA provides for modalities of the exchange in accordance with CRS, to ensure appropriate [3] Financial institutions include not only banks and custodians but also other financial institutions such as certain brokers, collective investment vehicles and insurance companies. flow of information and contains provisions for confidentiality, safeguards and the existence of the necessary infrastructure for an effective exchange relationship. AEOI and India Involvement The CRS on AEOI has been endorsed by the G20 countries, including India, who has given a call for its global implementation on a fully reciprocal basis by 2017 or India has taken a lead role in the international fora to build international consensus on AEOI. India is also an early adopter" committed to exchange information automatically by the year Furthermore, India has made necessary legislative changes through Finance (No. 2) Act, 2014 [4] to the existing provision of the Income Tax Act (ITA) [5], which creates an obligation to furnish statement of financial transactions. Necessary rules and guidelines in this regard, are being formulated in consultation with financial institutions [6]. Entering into MCAA for AEOI On 29 October 2014, 51 jurisdictions joined Multilateral Competent Authority Agreement (MCAA) at Berlin, which provides a framework for EOI on automatic basis as per the Standard. Subsequently other countries joined MCAA taking the total number of countries/jurisdiction to 54. Although India had agreed to be an early adopter of the Standard, it missed joining the MCAA in October Various press reports suggested that India was in the process of getting internal approvals. [4] Refer EY Global Tax Alert dated 22 July 2014 titled Update on India s Budget provisions related to foreign investment [5] S. 285BA of the ITA has been amended to provide for furnishing of statement by a prescribed reporting financial institution in respect of a specified financial transaction or reportable account to the prescribed income tax authority in the prescribed format. Penalty has also been prescribed for noncompliance. [6] Refer EY Tax Alert Annual Report by India s Ministry of Finance on International tax and transfer pricing matters

4 India joins the MCAA on 3 June 2015 India has joined the MCAA on 3 June 2015, in Paris, France [7]. With this, India will able to receive information on an automatic basis from the jurisdictions which have joined the MCAA as also from jurisdictions which join the MCAA subsequently. Comments Recently (in May 2015), the Indian administrative authority released a revised edition of the Indian manual on EOI [8]. This document provides detailed guidelines to Indian tax officers for making specific requests for EOI under various legal instruments and also contains guidelines to be followed in case a request is received [9]. It also gives an overview of the recent international developments in tax transparency including the global adoption of the standards on AEOI. AEOI based on CRS, when fully implemented, would enable India to receive information from almost every country in the world including offshore financial centers. Hence it would be instrumental in getting information about assets of Indians held abroad including through entities in which Indians are beneficial owners and thus aid in preventing international tax evasion and avoidance. [8] The earlier manual was released in [7] Press Note dated 3 June India has joined MCAA along with 6 other countries viz. Australia, Canada, Chile, Costa Rica, Indonesia and New Zealand [9] This document states that India has EOI relationships with more than 130 countries/ jurisdictions, which are legally committed to provide administrative assistance and are actually providing the same in cases where requests are made.

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