Exchange of Information and Collection of Taxes. BCAS January 2015

Exchange of Information and Collection of Taxes BCAS January 2015

Contents Exchange of Information Article 26 TIEA Section 94A Assistance in Collection of Taxes (Article 27) Multilateral Agreements Other Aspects Page 2

Exchange of Information - Why In view of liberalization and globalization of national economies, an increasing number of countries have limited controls on foreign investment and have relaxed foreign exchange controls. While tax authorities remain confined to their respective jurisdictions, taxpayers operate globally. This imbalance and the differences in national tax systems led to harmful tax practices with various jurisdictions increasing the focus on improved transparency and cooperation, which have led to the signing of DTAAs with the exchange of information article or a separate tax information exchange agreement (TIEAs). Reasons: Increasing Economic Globalization Expansion and Liberation of trade (such as development of electronic business activities, growing arena of multinational companies) International Tax Transparency International cooperation in tax matters Address harmful tax practices (such as shifting of tax base, hybrid entities, reconstructing the flow of transactions) To develop a legal instrument that could be used to establish effective exchange of information Page 3

Exchange of Information - Who The request for information from the tax authorities of the foreign jurisdictions with which India has entered into DTAA/TIEAs/Multilateral Agreements, should be routed through the Competent Authority The Competent Authority is defined in Article 3 of the Double Taxation Avoidance Agreement (generally Ministry of Finance - Department of Finance) or their authorized representative) As per the Manual on Exchange of Information, competent authority would be Joint Secretary of CBDT Page 4

Exchange of Information - How EOI Country has notified Double Taxation Avoidance Agreement with India Yes Article 26 No Country has notified Tax Information exchange agreement with India Yes Relevant clause(s) of the TIEA No Notified Jurisdiction under No Section 94A of the Income-tax Act, 1961 Yes Discourage transactions with persons located in such jurisdiction Page 5

Article 26 Exchange of Information Page 6

Article 26 Exchange of Information Good grounds for inclusion of Article concerning co-operation between tax administrations Relevant article creates an obligation to exchange information relevant to the correct application of a tax convention for purposes of the administration and enforcement of domestic tax laws of the contracting states Article 26 is independent of Article 25 (Mutual Agreement Procedures) and Article 27 (Collection of Taxes). Page 7

Article 26 Exchange of Information Framework Paragraph 1 Scope of Information Paragraph 2 Confidentiality of Information Paragraph 3 Limitations Paragraph 4 Information not required by requested State s laws Paragraph 5 Information held by banks and ownership interest Page 8

Article 26 Paragraph 1 1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. q Widest possible extent q No fishing expedition Competent Authorities Foreseeably Relevant information For carrying out the provisions of the Convention or administration of domestic law Not restricted by Article 1 and 2 of the Convention q Applies to non-residents Taxes of all kinds (not only those covered by this Convention) q In case a State wishes to restrict certain kinds of taxes, they may do so by stating in the Convention. Page 9

Article 26 Paragraph 1 Provides for exchange of information in tax matters to the widest possible extent Not limited to taxpayer-specific information, may also exchange other sensitive information related to tax administration and compliance improvement (for example risk analysis techniques or tax avoidance or evasion schemes) Request for information does not constitute a fishing expedition solely because it does not provide the name or address (or both) of the taxpayer under examination or investigation. However, requesting state must include other information sufficient to identify the tax payer This Article does not limit nor is limited by any existing international agreements or other arrangements between the Contracting States which relate to co-operation in tax matters It is sufficient even if information was relevant at the time a request is made but may become irrelevant when provided. Page 10

Article 26 Paragraph 1 - Example State A conduct a tax investigation into the affairs of Mr. X. Based on this investigation State A has indications that Mr. X holds one or several undeclared bank accounts with Bank B in State B. However, State A has experienced that, in order to avoid detection, it is likely that the bank accounts may be held in the name of relatives of the beneficial owner. State A therefore requests information on all accounts with Bank B of which Mr. X is the beneficial owner and all accounts held in the names of his spouse E and his children K and L Bank Accounts of Mr X may be held in the name of his relatives State A Mr. X Holds bank accounts Requests information on all accounts in which Mr. X is the beneficial owner and all accounts held in the names of his relatives State B Is the information foreseeably relevant? Can State B provide the same to State A? Page 11

Article 26 Paragraph 1 - Example Bank B is a bank established in State B. State A taxes its residents on the basis of their worldwide income. State A requests that State B to provide the names, date and place of birth, and account balances (including information on any financial assets held in such accounts) of residents of State A that have an account with, hold signatory authority over, or a beneficial interest in an account with Bank B in State B. The request states that Bank B is known to have a large group of foreign account holders but does not contain any additional information. State A Request state B to provide name, date and place of birth and account balances of state A who hold accounts in bank of state B State B Taxes Residents on world wide income Is the information foreseeably relevant? Can State B provide the same to State A? Page 12

Article 26 Paragraph 2 2. Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. Notwithstanding the foregoing, information received by a Contracting State may be used for other purposes when such information may be used for such other purposes under the laws of both States and the competent authority of the supplying State authorises such use. Held as secret Disclosed only to related persons and authorities Disclosure in public court proceedings May be used for other purposes if conditions are met Page 13

Article 26 Paragraph 2 Confidentiality / Secrecy a matter of domestic laws Disclosure to tax payer No disclosure to third country unless express provision in the agreement Information received by a Contracting State may be used for other purposes when such information may be used for such other purposes under the laws of both States; and the competent authority of the supplying State authorises such use Confidentiality rules requires that information requesting letter of competent authority should be kept confidential Requested State can disclose the minimum information contained in a competent authority letter (but not the letter itself unless court proceedings or the like under the domestic laws of the requested State necessitate the disclosure ) Page 14

Supreme Court Axe on Secrecy Facts of the Case Concern over alleged laundering of money by Hasan Ali Group and alleged stashing of unaccounted money by Indian Citizens in tax heavens German Government comes into possession names of 1,700 account holders in UBS, Liechtenstein and shared list with the Indian authorities on a confidential basis Petitioners demand disclosure of names received from Germany from the Union of India (UOI) Issues under consideration Appointment of a special investigation team Disclosures to the petitioners of documents relied upon by UOI Contention of the UOI UOI contended that the information cannot revealed as there is a requirement contained in the "exchange of information" article of the India Germany DTAA Supreme Court Comments Supreme Court held that India Germany DTAA permits disclosure in public Court proceedings; these need not be restricted to tax proceedings Secrecy clause of an agreement can not hinder constitutional proceedings or criminal proceedings. Page 15

Article 26 Paragraph 3 In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation: a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State; b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public). Carry out administrative practices beyond domestic laws Supply information not available in normal course Not required to : Disclose trade secrets Disclose information contrary to public policy Page 16

Article 26 Paragraph 3 Not bound to go beyond internal laws to provide the information Principle of reciprocity to be applied in a broad and pragmatic manner Principle of reciprocity has no application where the legal system or administrative practice of only one country provides for a specific procedure Information exchange, in certain limited cases may lead to disclosure of financial information which in turn may lead to reveal a trade or other secret May decline to disclose information relating to confidential communications between attorneys, solicitors or other admitted legal representatives Page 17

Article 26 Paragraph 4 If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information. Requested data may not be required for supplying state s tax purposes Information gathering measures subject to limitations of Paragraph 3 Limitations not to be construed to decline supply of information solely because no domestic interest Improving access to bank information for tax purposes Added in 2005 to Model Tax Convention Page 18

Article 26 Paragraph 5 In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person. Deals with information held by bank, financial institution, nominee or person in agency Overrides Article 3 for banking secrecy Reasons for refusal should be unrelated to person s status such as Bank Improving access to bank information for tax purposes Added in 2005 to Model Tax Convention Page 19

Article 26 Paragraph 5 Company X owns a majority of the stock in a subsidiary company Y, and both companies are incorporated under the laws of State A. State B is conducting a tax examination of business operations of company Y in State B. In the course of this examination the question of both direct and indirect ownership in company Y becomes relevant. State B makes a request to State A for ownership information of any person in company Y's chain of ownership. X Co Owns majority stock Business operations of Y Co Y Co State B can request ownership information for both company X and Y State A State B Should State A provide to State B ownership information for both company X and Y? Page 20

Article 26 Paragraph 6 (UN Model only) The competent authorities shall, through consultation, develop appropriate methods and techniques concerning the matters in respect of which exchanges of information under paragraph 1 shall be made. Competent Authorities Consultation Develop methods and techniques Para 6 not a part of OECD model tax convention Added in 2011 to Model Tax Convention Page 21

Tax Information Exchange Agreement (TIEA) A TIEA is an outcome of initiatives undertaken by OECD and its member status. It is designed to address both multilateral and bilateral scenarios but is not a binding instrument. Tax Information Exchange Agreement The basic aim and purpose of TIEA is to engage states in extending co-operation in exchange of information for tax purposes to each other. Other objectives which may be catered are as follows: Greater transparency to reduce tax evasion Stronger international banking regulation to stop advantage by taxpayers of jurisdictions that offer bank secrecy & confidentiality laws The effectiveness of TIEAs largely depends upon the Member State s financial system and require that they also adopt the standard of tax information exchange set out in this document. Page 22

Tax Information Exchange Agreement (TIEA) The Indian Tax Law (ITL) was amended in April 2010 enable India to enter into agreements with specified non-sovereign jurisdictions. This amendment possibly indicated the intention of the Government to enter into TIEA to prevent fiscal evasion. International tax evasion and the implementation of the Organization for Economic Cooperation and Development s (OECD s) internationally agreed tax standard have taken high positions on the global political agenda. A TIEA is an outcome of initiatives undertaken by OECD and its member status. It is designed to address both multilateral and bilateral scenarios but is not a binding instrument. The basic aim and purpose of TIEA is to engage states in extending co-operation in exchange of information for tax purposes to each other. Page 23

Tax Information Exchange Agreement (TIEA) Other objectives which may be catered are as follows: Greater transparency to reduce tax evasion Stronger international banking regulation to stop advantage by taxpayers of jurisdictions that offer bank secrecy & confidentiality laws The effectiveness of TIEAs largely depends upon the Member State s financial system and require that they also adopt the standard of tax information exchange set out in this document. Page 24

Model TIEA The Model TIEA framed by OECD consists of the following points: Object and scope of the Agreement Jurisdiction Taxes covered Definitions Exchange of information upon request Tax examinations abroad Possibility of declining a request for information Confidentiality Implementation legislation Mutual Agreement Procedure Entry Into Force Termination Page 25

Indian TIEAs Currently India has signed TIEA with the following 15 countries: Bermuda Cayman Islands Bahamas Isle of Man Guernsey Macau British Virgin Islands Jersey Liberia Liechtenstien Gibraltar Argentina Bahrain Belize Monaco Page 26

Section 94A Finance Budget 2011 introduced a new concept to discourage transactions with persons located in notified countries or territories ( Notified Jurisdiction ) which do not effectively exchange information with India. Some of the tax consequences likely to result on application of such provisions have been discussed in brief below: Any transaction between Indian taxpayer and a company located in notified jurisdictions will be deemed to be an international transaction, subject to Indian transfer pricing regulations No deduction will be allowed for any expenditure arising from such transactions Any sum received / credited from a company resident in notified jurisdictions will be deemed to be the income of the Indian taxpayer unless the source of such receipt is explained Currently, no countries or territories (i.e. not having a TIEA with India) have been notified by India Revenue Authorities Page 27

Mechanisms for Exchange of Information Article 27 Assistance in Collection of Taxes Page 28

Article 27 Assistance in Collection of Taxes Article to be included in the convention only where a state concludes that they can agree to provide assistance in collection of taxes levied by the other state. Some factors to determine whether and to what extent assistance to be given includes: Stance taken in national law Extent of similarity of tax systems, tax administrations, etc. Balanced reciprocal benefits Trade and investment flows Generally, article provides for comprehensive collection of taxes. However, some states may agree on limited type of collection assistance such as To the extent that benefits under the convention shall not be enjoyed by persons not entitled to such benefits (e.g. if person not entitled to exemption / reduced tax rate benefits, assistance of such article will not be available in such situation) Article to not impose obligation Page 29

Article 27 Assistance in Collection of Taxes Framework Paragraph 1 Obligation to lend assistance Paragraph 2 Paragraph 3 Paragraph 4 Paragraph 5 Paragraph 6 Paragraph 7 Paragraph 8 Definition of Revenue claim Conditions for request Request for measures of conservancy Timelimits and priority for collection of taxes Legal recourse in requested State Cessation of Revenue claim Limitations Page 30

Article 27 Paragraph 1 The Contracting States shall lend assistance to each other in the collection of revenue claims. This assistance is not restricted by Articles 1 and 2. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of this Article. Obliged to assist in connection of revenue claims Not restricted by Article 1 and 2 Mode of application of article to be settled Page 31

Article 27 Paragraph 1 Contracting states obliged to assist in tax collection provided conditions (as specified in other paragraphs) are met Confidentiality of information is ensured Practical application to be decided mutually. Documentation may also be dealt with. The agreement should also deal with the issue of costs where ever irrecoverable from the concerned person Extraordinary costs to be borne by requesting state unless agreed otherwise Other practical issues concerning Limit of time, Exchange rate and Remittance method Section 228(A)(1) of Income-tax Act, 1961 empowers the Indian Tax Recovery Officer to recover dues of foreign countries while sub section 2 empowers TRO to forward request for collection of taxes through Competent Authorities Page 32

Article 27 Paragraph 2 The term "revenue claim" as used in this Article means an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to this Convention or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount. Definition of Revenue claim Any amount owed Taxes of any kind Also applies to interest, administrative penalties and costs of collection Page 33

Article 27 Paragraph 2 If States may prefer to limit the application to the article to taxes covered by the convention, paragraph 1 and 2 should be changed to reflect this and may provide a detailed list of taxes Nothing in the article prevents application of the article to revenue claims that arise before the convention enters into force. States wishing to restrict this are free to do so. Page 34

Article 27 Paragraph 3 When a revenue claim of a Contracting State is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of collection by the competent authority of the other Contracting State. That revenue claim shall be collected by that other State in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State. Enforceable under the law of the requesting state Conditions Owed by a person who at that time (under the laws of the requesting state) cannot prevent its collection If local laws of requested state does not permit revenue claim when an appeal is pending, this paragraph does not authorize to collect even if the laws of requesting state permits collection in such situation. States wishing to change this can do so and modify the paragraph accordingly Recover such taxes as if the same is tax of it s own state Requesting state shall indicate nature, components and date of expiry of revenue claim if such tax does not exist in the requested state Page 35

Article 27 Paragraph 4 When a revenue claim of a Contracting State is a claim in respect of which that State may, under its law, take measures of conservancy with a view to ensure its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of taking measures of conservancy by the competent authority of the other Contracting State. That other State shall take measures of conservancy in respect of that revenue claim in accordance with the provisions of its laws as if the revenue claim were a revenue claim of that other State even if, at the time when such measures are applied, the revenue claim is not enforceable in the firstmentioned State or is owed by a person who has a right to prevent its collection. Enables request for application for measures of conservancy Request cannot be made unless requesting state can itself take such measures Indicate stage in the process of assessment Page 36

Article 27 Paragraph 5 and 6 Paragraph 5 Notwithstanding the provisions of paragraphs 3 and 4, a revenue claim accepted by a Contracting State for purposes of paragraph 3 or 4 shall not, in that State, be subject to the time limits or accorded any priority applicable to a revenue claim under the laws of that State by reason of its nature as such. In addition, a revenue claim accepted by a Contracting State for the purposes of paragraph 3 or 4 shall not, in that State, have any priority applicable to that revenue claim under the laws of the other Contracting State. Time limits of requesting state are applicable, not of requested State Paragraph 6 Proceedings with respect to the existence, validity or the amount of a revenue claim of a Contracting State shall not be brought before the courts or administrative bodies of the other Contracting State. Legal or Administrative objection to be decided by requesting state s courts No Proceedings regarding claims in requested state s courts Page 37

Article 27 Paragraph 7 Where, at any time after a request has been made by a Contracting State under paragraph 3 or 4 and before the other Contracting State has collected and remitted the relevant revenue claim to the first-mentioned State, the relevant revenue claim ceases to be in the case of a request under paragraph 3, a revenue claim of the first-mentioned State that is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, or in the case of a request under paragraph 4, a revenue claim of the first-mentioned State in respect of which that State may, under its laws, take measures of conservancy with a view to ensure its collection the competent authority of the first-mentioned State shall promptly notify the competent authority of the other State of that fact and, at the option of the other State, the first-mentioned State shall either suspend or withdraw its request. When revenue claim ceases to be for any reason Notify the competent authority of the other State Suspend / withdraw request Page 38

Article 27 Paragraph 8 In no case shall the provisions of this Article be construed so as to impose on a Contracting State the obligation: to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State; to carry out measures which would be contrary to public policy (ordre public); to provide assistance if the other Contracting State has not pursued all reasonable measures of collection or conservancy, as the case may be, available under its laws or administrative practice; to provide assistance in those cases where the administrative burden for that State is clearly disproportionate to the benefit to be derived by the other Contracting State. Carry out administrative practices beyond domestic laws Carry out measures contrary to public policy No obligation to : Comply if requesting state has not pursued all reasonable measures If administrative benefit disproportionate to benefit Page 39

Multilateral Agreements Page 40

Multilateral Agreements (with SAARC countries) The South Asian Association for Regional Cooperation (SAARC) Member States have signed a Limited Multilateral Agreement on Avoidance of Double Taxation and Mutual Administrative Assistance in tax matters on 13 November, 2005 during the 13 th SAARC Summit at Dhaka on 12 th -13 th November, 2005. The SAARC member states India, Pakistan, Bangladesh, Nepal, Bhutan, Sri Lanka and Maldives. The agreement mainly envisages cooperation between the member states in the following matters: Exchange of information Assistance in collection of taxes Service of documents Training of tax administrations Sharing of tax policy Page 41

Multilateral Convention on Mutual Administrative Assistance India has signed Multilateral Convention on Mutual Administrative Assistance in Tax Matters on 26 January 2012. Some of the countries which have signed this convention do not have a DTAA / TIEA with India and thus Multilateral Convention India s treaty network for the purpose of exchange of information / collection of taxes. The parties to the convention are obliged to provide a wide range of administrative assistance to each other subject to reservations. Page 42

Other Forms of Assistances The DTAAs / TIEAs / Multilateral instruments entered into by India provides for a multitude of administrative assistance, in addition to exchange of information in specific cases. These other forms of administrative assistance include Automatic Exchange of Information Spontaneous Exchange of Information Tax Examination Abroad Simultaneous Examination Joint Audits India is sending and receiving information under automatic / spontaneous Exchange of Information India s experience in Tax Examination Abroad, Simultaneous Examination and Joint Audits is negligible but it is expected that in future, Indian tax officers will utilize these form of administrative assistance more and more. Page 43

Questions Page 44

Thank You Views expressed are personal