Exchange of Information and Collection of Taxes · · 2017-10-17Assistance in Collection of Taxes ... kinds of taxes, they may do so by stating in ... to supply information which

Exchange of Information andCollection of TaxesBCAS – January 2015

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Contents► Exchange of Information

► Article 26

► TIEA

► Section 94A

► Assistance in Collectionof Taxes (Article 27)

► Multilateral Agreements

► Other Aspects

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Exchange of Information - Why

In view of liberalization and globalization of national economies, an increasing number of countrieshave limited controls on foreign investment and have relaxed foreign exchange controls. While taxauthorities remain confined to their respective jurisdictions, taxpayers operate globally. Thisimbalance and the differences in national tax systems led to harmful tax practices with variousjurisdictions increasing the focus on improved transparency and cooperation, which have led to thesigning of DTAAs with the exchange of information article or a separate tax information exchangeagreement (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 theflow of transactions)

► To develop a legal instrument that could be used to establish effective exchange of information

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Exchange of Information - Who

► The request for information from the tax authorities of the foreign jurisdictions withwhich India has entered into DTAA/TIEAs/Multilateral Agreements, should be routedthrough the Competent Authority

► The Competent Authority is defined in Article 3 of the Double Taxation AvoidanceAgreement (generally Ministry of Finance - Department of Finance) or their authorizedrepresentative)

► As per the Manual on Exchange of Information, competent authority would be JointSecretary of CBDT

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Exchange of Information - How

Country has notified Double TaxationAvoidance Agreement with India

Country has notified Tax Informationexchange agreement with India

No

No

EOI

Notified Jurisdiction under Section94A of the Income-tax Act, 1961

No

Discourage transactions with personslocated in such jurisdiction

Relevant clause(s) of the TIEA

Article 26Yes

Yes

Yes

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Article 26Exchange of Information

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Article 26 – Exchange of Information

► Good grounds for inclusion of Article concerning co-operation between taxadministrations

► 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 thecontracting states

► Article 26 is independent of Article 25 (Mutual Agreement Procedures) and Article 27(Collection of Taxes).

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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

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Article 26 – Paragraph 1

► 1. The competent authorities of the Contracting States shall exchange such information as is foreseeably relevantfor carrying out the provisions of this Convention or to the administration or enforcement of the domesticlaws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of theirpolitical subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention.

CompetentAuthorities

ForeseeablyRelevant

information

For carrying outthe provisions ofthe Convention

or administrationof domestic law

Not restricted byArticle 1 and 2 ofthe 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 inthe Convention.

q Widest possible extentq No fishing expedition

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► Provides for exchange of information in tax matters to the widest possible extent

► Not limited to taxpayer-specific information, may also exchange other sensitive informationrelated to tax administration and compliance improvement (for example risk analysis techniquesor tax avoidance or evasion schemes)

► Request for information does not constitute a fishing expedition solely because it does notprovide 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 becomeirrelevant when provided.

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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

Mr. X

State B

State ABank Accounts

of Mr X maybe held in thename of his

relatives

Requests information on all accountsin which Mr. X is the beneficial ownerand all accounts held in the names ofhis relatives

Holds bankaccounts

Is the information ‘foreseeably relevant’? Can State B provide the same to State A?

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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 havean account with, hold signatory authority over, or a beneficial interest in an account with Bank B inState B.

► The request states that Bank B is known to have a large group of foreign account holders but doesnot contain any additional information.

State A State B

Taxes Residentson world wide

income

Request state B to provide name,date and place of birth and accountbalances of state A who hold accountsin bank of state B

Is the information ‘foreseeably relevant’? Can State B provide the same to State A?

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► 2. Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manneras information obtained under the domestic laws of that State and shall be disclosed only to persons orauthorities (including courts and administrative bodies) concerned with the assessment or collection of, theenforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to inparagraph 1, or the oversight of the above. Such persons or authorities shall use the information only for suchpurposes. 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 whensuch information may be used for such other purposes under the laws of both States and the competentauthority of the supplying State authorises such use.

Held assecret

Disclosedonly torelated

persons andauthorities

Disclosurein public

courtproceedings

May be usedfor other

purposes ifconditions

are met

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► 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 authorityshould 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 ofthe requested State necessitate the disclosure )

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Supreme Court Axe on Secrecy

► Facts of the Case

► Concern over alleged laundering of money by Hasan Ali Group and alleged stashing ofunaccounted 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 criminalproceedings

.

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► In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State theobligation:a) to carry out administrative measures at variance with the laws and administrative practice of that or of the otherContracting State;b) to supply information which is not obtainable under the laws or in the normal course of the administration of that orof the other Contracting State;c) to supply information which would disclose any trade, business, industrial, commercial or professional secret ortrade process, or information the disclosure of which would be contrary to public policy (ordre public).

Carry outadministrative

practicesbeyond

domestic laws

Supplyinformation

not availablein normal

course

Disclose tradesecrets

Discloseinformationcontrary to

public policy

Not required to :

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► 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 administrativepractice of only one country provides for a specific procedure

► Information exchange, in certain limited cases may lead to disclosure of financialinformation which in turn may lead to reveal a trade or other secret

► May decline to disclose information relating to confidential communicationsbetween attorneys, solicitors or other admitted legal representatives

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► If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall useits information gathering measures to obtain the requested information, even though that other State may notneed such information for its own tax purposes. The obligation contained in the preceding sentence is subject tothe limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting Stateto decline to supply information solely because it has no domestic interest in such information.

Requested datamay not berequired for

supplying state’stax purposes

Informationgathering

measures subjectto limitations of

Paragraph 3

Limitations not tobe construed to

decline supply ofinformation solely

because nodomestic interest

Improving accessto bank

information fortax purposes

Added in 2005 toModel Tax

Convention

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► In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supplyinformation solely because the information is held by a bank, other financial institution, nominee or personacting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.

Deals withinformation held

by bank, financialinstitution,nominee or

person in agency

Overrides Article3 for banking

secrecy

Reasons forrefusal should be

unrelated toperson’s statussuch as Bank

Improving accessto bank

information fortax purposes

Added in 2005 toModel Tax

Convention

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► Company X owns a majority of the stock in a subsidiary company Y, and both companies areincorporated under the laws of State A.

► State B is conducting a tax examination of business operations of company Y in State B. In thecourse of this examination the question of both direct and indirect ownership in company Y becomesrelevant .

► State B makes a request to State A for ownership information of any person in company Y's chain ofownership.

State A State B

Y Co

X CoBusiness

operations of YCo

State B can request ownershipinformation for both company Xand Y

Owns majority stock

Should State A provide to State B ownership information for both company X and Y?

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Article 26 – Paragraph 6 (UN Model only)

► The competent authorities shall, through consultation, develop appropriate methods and techniques concerningthe matters in respect of which exchanges of information under paragraph 1 shall be made.

CompetentAuthorities Consultation

Developmethods

andtechniques

Para 6 not apart of

OECD modeltax

conventionAdded in 2011 to

Model TaxConvention

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Tax Information Exchange Agreement (TIEA)

► A TIEA is an outcome of initiatives undertaken by OECD and its member status. It isdesigned to address both multilateral and bilateral scenarios but is not a bindinginstrument.

► The basic aim and purpose of TIEA is to engage states in extending co-operation inexchange 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 systemand require that they also adopt the standard of tax information exchange set out in thisdocument.

Tax Information ExchangeAgreement

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► The Indian Tax Law (ITL) was amended in April 2010 enable India to enter intoagreements with specified non-sovereign jurisdictions. This amendment possiblyindicated the intention of the Government to enter into TIEA to prevent fiscal evasion.

► International tax evasion and the implementation of the Organization for EconomicCooperation and Development’s (OECD’s) internationally agreed tax standard havetaken high positions on the global political agenda.

► A TIEA is an outcome of initiatives undertaken by OECD and its member status. It isdesigned to address both multilateral and bilateral scenarios but is not a bindinginstrument.

► The basic aim and purpose of TIEA is to engage states in extending co-operation inexchange of information for tax purposes to each other.

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► 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 systemand require that they also adopt the standard of tax information exchange set out in thisdocument.

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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

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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

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Finance Budget 2011 introduced a new concept to discourage transactions with personslocated in notified countries or territories (‘Notified Jurisdiction’) which do not effectivelyexchange information with India. Some of the tax consequences likely to result on applicationof such provisions have been discussed in brief below:

► Any transaction between Indian taxpayer and a company located in notified jurisdictionswill be deemed to be an international transaction, subject to Indian transfer pricingregulations

► No deduction will be allowed for any expenditure arising from such transactions

► Any sum received / credited from a company resident in notified jurisdictions will bedeemed to be the income of the Indian taxpayer unless the source of such receipt isexplained

Currently, no countries or territories (i.e. not having a TIEA with India) have been notified byIndia Revenue Authorities

Section 94A

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Mechanisms for Exchange of Information

Article 27Assistance in Collection of

Taxes

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Article 27 – Assistance in Collection of Taxes

► Article to be included in the convention only where a state concludes that theycan agree to provide assistance in collection of taxes levied by the otherstate.

► Some factors to determine whether and to what extent assistance to be givenincludes:► 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 taxrate benefits, assistance of such article will not be available in such situation)

► Article to not impose obligation

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Article 27 – Assistance in Collection of Taxes

Framework

Paragraph 1 Obligation to lend assistance

Paragraph 2 Definition of ‘Revenue claim’

Paragraph 3 Conditions for request

Paragraph 4 Request for measures of conservancy

Paragraph 5 Timelimits and priority for collection of taxes

Paragraph 6 Legal recourse in requested State

Paragraph 7 Cessation of Revenue claim

Paragraph 8 Limitations

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► The Contracting States shall lend assistance to each other in the collection of revenue claims. This assistanceis not restricted by Articles 1 and 2. The competent authorities of the Contracting States may by mutualagreement settle the mode of application of this Article.

Obliged to assist inconnection of revenue

claims

Not restricted by Article1 and 2

Mode of application ofarticle to be settled

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► Contracting states obliged to assist in tax collection provided conditions (as specified inother 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 fromthe 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 recoverdues of foreign countries while sub section 2 empowers TRO to forward request for collection oftaxes through Competent Authorities

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► The term "revenue claim" as used in this Article means an amount owed in respect of taxes of every kind anddescription imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofaras the taxation thereunder is not contrary to this Convention or any other instrument to which the Contracting Statesare parties, as well as interest, administrative penalties and costs of collection or conservancy related to suchamount.

Definition of ‘Revenueclaim’

Any amount owed –Taxes of any kind

Also applies to interest,administrative penaltiesand costs of collection

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► If States may prefer to limit the application to the article to taxes covered by theconvention, paragraph 1 and 2 should be changed to reflect this and may provide adetailed list of taxes

► Nothing in the article prevents application of the article to revenue claims that arisebefore the convention enters into force. States wishing to restrict this are free to doso.

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► When a revenue claim of a Contracting State is enforceable under the laws of that State and is owed by aperson 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 competentauthority of the other Contracting State. That revenue claim shall be collected by that other State in accordance withthe provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were arevenue claim of that other State.

► If local laws of requested state does not permit revenue claim when an appeal ispending, this paragraph does not authorize to collect even if the laws of requesting statepermits collection in such situation. States wishing to change this can do so and modifythe 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 ifsuch tax does not exist in the requested state

ConditionsEnforceable under the law of

the requesting stateOwed by a person who at that time(under the laws of the requesting

state) cannot prevent its collection

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► When a revenue claim of a Contracting State is a claim in respect of which that State may, under its law, takemeasures of conservancy with a view to ensure its collection, that revenue claim shall, at the request of thecompetent authority of that State, be accepted for purposes of taking measures of conservancy by the competentauthority of the other Contracting State. That other State shall take measures of conservancy in respect of thatrevenue claim in accordance with the provisions of its laws as if the revenue claim were a revenue claim of that otherState even if, at the time when such measures are applied, the revenue claim is not enforceable in the first-mentioned State or is owed by a person who has a right to prevent its collection.

Enables request forapplication for measures of

conservancy

Request cannot be madeunless requesting state canitself take such measures

Indicate stage in theprocess of assessment

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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 arevenue claim under the laws of that State by reason of its nature as such. In addition, a revenue claim accepted by aContracting State for the purposes of paragraph 3 or 4 shall not, in that State, have any priority applicable to thatrevenue claim under the laws of the other Contracting 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.

Time limits of requesting state are applicable, not of requested State

Legal or Administrative objection – to be decided by requesting state’s courts

No Proceedings regarding claims in requested state’s courts

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► Where, at any time after a request has been made by a Contracting State under paragraph 3 or 4and before the other Contracting State has collected and remitted the relevant revenue claim to thefirst-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 thatState may, under its laws, take measures of conservancy with a view to ensure its collection the competentauthority of the first-mentioned State shall promptly notify the competent authority of the other State of that factand, at the option of the other State, the first-mentioned State shall either suspend or withdraw its request.

When revenueclaim ceases to be

for any reason

Notify thecompetent authorityof the other State

Suspend / withdrawrequest

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► 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 outadministrative

practices beyonddomestic laws

Carry outmeasures

contrary to publicpolicy

Comply ifrequesting statehas not pursuedall reasonable

measures

If administrativebenefit

disproportionateto benefit

No obligation to :

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Multilateral Agreements

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Multilateral Agreements (with SAARCcountries)► The South Asian Association for Regional Cooperation (SAARC) Member States have

signed a Limited Multilateral Agreement on Avoidance of Double Taxation and MutualAdministrative Assistance in tax matters on 13 November, 2005 during the 13th SAARCSummit at Dhaka on 12th-13th November, 2005.

► The SAARC member states – India, Pakistan, Bangladesh, Nepal, Bhutan, Sri Lankaand Maldives.

► The agreement mainly envisages cooperation between the member states in thefollowing matters:

► Exchange of information► Assistance in collection of taxes► Service of documents► Training of tax administrations► Sharing of tax policy

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Multilateral Convention on MutualAdministrative 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 / TIEAwith India and thus Multilateral Convention India’s treaty network for the purpose ofexchange of information / collection of taxes.

► The parties to the convention are obliged to provide a wide range of administrativeassistance to each other subject to reservations.

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Other Forms of Assistances

► The DTAAs / TIEAs / Multilateral instruments entered into by India provides for amultitude of administrative assistance, in addition to exchange of information in specificcases. 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 ofInformation

► India’s experience in Tax Examination Abroad, Simultaneous Examination and JointAudits is negligible but it is expected that in future, Indian tax officers will utilize theseform of administrative assistance more and more.

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Questions

Views expressedare personal

Thank You

Documents

Exchange of Information and Collection of Taxes · · 2017-10-17Assistance in Collection of Taxes ... kinds of taxes, they may do so by stating in ... to supply information which