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Cyprus tax row: India set to start I-T office in island nation
December, 23rd 2013

As part of its strategy to combat blackmoney, India will soon operationalise its first-ever Income Tax office in Cyprus to tackle funds flowing from the island nation even as it mulls rolling back suspension of tax benefits on investments made from that country.

Sources said final approvals from the Prime Minister's Office (PMO) have been obtained to post an Indian Revenue Service officer as First Secretary in the country, one of the main sources of foreign direct investment into India, and also at seven other foreign locations which include France, Germany, Netherlands, Japan, UAE, UK and USA.

"The offices have already been set up in these countries and with the posting of these officers they will begin operations in the next one month," sources privy to the development said.

The government had decided to set up the Income Tax Overseas Units (ITOUs) in these eightcountries as part of its multi-pronged strategy to combat blackmoney and streamline flow of investments from these nations into India. Two such ITOUs are already operational in Mauritius and Singapore.

India and Cyprus had entered into a Double Taxation Avoidance Agreement (DTAA) in 1994.But in November this year, India classified the island nation as a notified jurisdictional area and suspended the tax benefits.

Following the notification by the Finance Ministry, all payments made to Cyprus attracted a 30 per cent withholding tax and Indian entities receiving money from there were required to disclose the source of funds.

India took the decision to withdraw tax benefits on grounds that Cyprus was not providing information requested by tax authorities under the taxation treaty.

After this decision Cyprus had said the Indian government has agreed to withdraw a notification that suspended tax benefits for investments from the island nation but this is subject to the foreign nation adopting the global convention on exchange of tax information.

In a recent statement on renegotiation of the existing DTAA (Double Taxation Avoidance Agreement), Cyprus also said a new tax treaty is expected to be finalised soon.

Cyprus also said it would adopt provisions of Article 26 of the OECD Model Tax Convention relating to exchange of information in a new DTAA between the two countries.

The government's intention to increase the numbers of ITOUs is drawn from the idea that these units could obtain hassle-free information on tax and financial data of investments made by individuals and institutions in these countries and facilitate exchange of data on legal investment or routing of money in India and vice-versa.

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