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The tax-information exchange conundrum
November, 15th 2013

It is not uncommon to hear the phrase ‘information overload’ a lot these days. We live in a densely connected world with every nook and corner saturated with information. With the advent of the internet, boundaries of nationalities and cultures are increasingly getting blurred, bringing people from different parts of the world closer.
The same cannot be said for governments, however. Faced with a global slowdown leading to high fiscal deficits on account of foregone tax revenues, countries are increasingly directing their efforts towards extracting information regarding tax foregone on account of beneficial provisions being exploited in tax havens. Information is also crucial as corporations increasingly shift to low tax jurisdictions and tax havens.

A meeting of the G-8 countries hopes to give further momentum to these efforts. Representatives from Germany, France, Britain, Italy and Spain recently convened to discuss and develop mechanisms to clamp down on tax evaders and tax havens by ensuring seamless information exchange. Countries such as Jersey and Cayman Islands, which have many shell corporations, agreed to sign a multi-lateral convention on information-swapping.

India is not far behind—the current government approached various jurisdictions, including Mauritius, for data on offshore bank accounts of certain Indian entities, motivated by the issue taking the spotlight in the run up to the general elections in 2009. The efforts are not limited to purely obtaining information. Indian tax authorities now have provisions in the income tax legislation and double taxation treaties which disincentivise trade and transactions with identified tax havens.

The concept of ‘notified jurisdictions’ legislated vide the Finance Act, 2011, is a step in this direction. The introduction of Section 94A ensures that certain countries which do not effectively exchange information may be notified by the government. As a consequence of the notification, transactions with such territories shall attract increased scrutiny and higher rates of withholding, among other restrictions.

Current Position
The legislative intent behind the introduction of Section 94A is to mandate rigorous documentation on the part of the Indian resident undertaking transactions with entities in the notified territory, allowing Indian tax authorities to scrutinise such transactions in depth.

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