Decision to put investments under lens a unilateral measure: Cyprus

NEW DELHI: Terming decision of India to investments from Cyprus under tax lens a "unilateral measure", the island nation said that it will soon hold talks with Indian authorities to sort out the taxation issue.

"The Ministry of Finance of the Republic of India has taken the unilateral measure...," Finance Ministry of Cyprus said in its reaction to India's decision to name Cyprus as a notified jurisdictional area with a view to check tax evasion.

In an e-mailed reply to PTI, a spokesperson of Cyprus government said, "concerned competent authorities of India and Cyprus are in direct contact and will soon decide when to meet in order to discuss the points that need to be clarified."

In a notification on November 1, the Finance Ministry said that since Cyprus has not been providing the information requested by tax authorities under exchange of information provisions of the double taxation avoidance pact, it has been decided to classify it as a notified jurisdictional area.

Following the notification, all payments made to Cyprus will attract 30 per cent withholding tax and Indian entities receiving money from there will be required to disclose the source of funds. The transactions may also be covered by transfer pricing regulations.

"Low tax jurisdictions have been coming under increasing pressure from cash strapped countries across the world for encouraging tax base erosion and profit shifting. Cyprus has been used by investors for doing structured debt-equity deals and this decision is bound to soothe nerves of investors," said Amit Maheshwari, Partner, Ashok Maheshwary & Associates.

Cypriot government further said it attaches primary importance to implementation of its contractual obligations stemming from bilateral and international agreements.

"It is the position of the Cypriot Government that any discrepancies and points that need clarification can only be resolved through direct consultations between the concerned competent authorities, which have been agreed to take place within November 2013," it said.

While reiterating commitment for holding talks with India for finalising the review of the double tax treaty, Cyprus further said "it is important to clarify that the double tax treaty between the two countries has not been terminated".

India and Cyprus had entered into an agreement for avoidance of double taxation of income and prevention of fiscal evasion which is in force since December, 1994.

Cyprus is the seventh largest source of FDI to India. Cyprus Minister of Foreign Affairs Ioannis Kasoulides is scheduled to participate in the deliberations of the Ministerial Asia-Europe Meeting (ASEM), which will take place between November 11 and November 12 in Gurgaon.

Kasoulides will hold bilateral meetings with Indian Foreign Affairs Minister Salman Khurshid, the Cyprus government said in a statement.

Commenting on the development, Deputy CEO KMPG in India Dinesh Kanabar said the notification (covered by Section 94 A of the Income-tax Act) constitutes a landmark in that it demonstrates India's resolve to not be a bystander on the issue tax treaty shopping.

"As a consequence, payments to Cyprus entities now qualify for maximum tax withholding and not the lower rates prescribed under the tax treaty. Also, the stringent provisions of transfer pricing apply to all transactions with Cyprus," he said.

Further, expenses incurred on payments to Cyprus entities are non-tax deductible expect under certain conditions.

"This will act as a notice to other jurisdictions that India means business," Kanabar said.

Section 94A was introduced in the Income-tax Act, 1961, through the Finance Act, 2011, in respect of transactions with persons located in notified jurisdictional area as an anti-avoidance measure.