One of the major challenges faced by countries in the 21st century is controlling tax evasion and tapping unaccounted money.
Globalisation of the world economy has made these issues more challenging, as the trail of unaccounted money in most cases lies outside the territorial jurisdiction of a particular country. There is increasing consensus among various countries that tax evasion must be controlled, for which they enter into agreements for exchange of information.
Type of agreements
Countries generally enter into Double Taxation Avoidance Agreements (DTAA) and Tax Information Exchange Agreements (TIEA) to legally engage in exchange of relevant information.
DTAAs are comprehensive agreements that distribute the taxing rights on an income between the country that the taxpayer is a resident of and the one in which the income is generated. It includes a specific clause that provides for the mechanism of sharing information between the two countries.
TIEAs, on the other hand, are generally entered into when comprehensive DTAAs cannot be signed; TIEAs are drawn up exclusively for information exchange.
In addition to the above, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Multilateral Convention) also provides an avenue for exchange of information between member countries.
Role of international bodies
Various international bodies have assessed the need for this information exchange from the perspective of transparency and have played a pivotal role in strengthening the cooperation between countries for this purpose.
The Organisation for Economic Cooperation and Development (OECD) is a pioneer in developing methods to fight tax evasion. It has constantly encouraged countries to exchange information for greater tax transparency. The European Union and United Nations too are actively focusing on this issue.
Manner of exchange of information
As per the agreements and rules outlined by the international organisations, there are three methods of exchanging information between countries.
One — The competent authority of a country raising a request for information as per the DTAA provisions.
Two — Automatic exchange of information on a periodic basis by countries.
Three — Spontaneous sharing across countries of information acquired during the course of investigations.
India’s position, recent initiatives
At international forums, India has always been vocal in its support of an exchange of information across countries to create an environment of transparency and combat tax evasion.
India is the first country outside the OECD member-countries to become party to the multilateral convention on Mutual Administrative Assistance in Tax Matters. So far, India has signed more than 90 DTAAs and entered into TIEAs with 17 countries.
The Indian Government has also joined the Multilateral Competent Authority Agreement (MCAA) to obtain information on an automatic basis from other countries. It also entered into an Inter-Governmental Agreement with the US to implement the Foreign Account Tax Compliance Act (FATCA) in India, which would lead to sharing information about accounts and assets located in both countries.
Recently, the Indian Government stepped up its efforts to bring back unaccounted money from foreign jurisdictions. With this objective, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 was enacted. This Act provides for the Indian Government to sign a pact with any other country for information exchange with regard to prevention of evasion or avoidance of tax on undisclosed foreign income.
A case
In November 2013, Cyprus was notified as a “notified jurisdictional area” for lack of effective exchange of information. This led to imposition of higher withholding tax rates. A series of discussions took place between the Indian and Cypriot Governments and a consensus was reached on the issue of information exchange. The Indian Government issued a press release stating that it would consider removing Cyprus from the list of notified jurisdictions with retrospective effect from November 2013.
The present Article in the India Mauritius DTAA that deals with exchange of information was amended to bring it in line with international standards.
Conclusion
Governments of various countries and international agencies are constantly attempting to develop different modes for effective exchange of information. The base erosion and profit-shifting (BEPS) project also recognises the importance of information exchange to attain the goal of tax transparency and avoidance of tax evasion. However, some countries are still reluctant to share information without valid reasons.
The recent instance of the Panama Papers leaks highlights the need for more comprehensive cooperation among countries to eradicate tax evasion. A robust structure for this is crucial, given the spread of globalisation, and a free information exchange across borders will play a predominant role in arresting tax leakages.
(Vishal Anand is Partner at Direct Tax and Soumyadip Roy Choudhury is Manager at Direct Tax in PwC India)