Update 07.11.2013: The Government of Cyprus has issued a reply to the Indian Government’s Notification
The Ministry of Finance has issued a Notification dated 1.11.2013 notifying Cyprus as a “notified jurisdictional area” u/s 94A of the Income-tax Act, 1961. The consequences of the Notification are draconian and are broadly the following:
(i) All transactions with a person in Cyprus will have to meet the rigors of transfer pricing;
(ii) A deduction in respect of any payment made to any financial institution in Cyrus and deduction in respect of any other expenditure or allowance arising from the transaction with a person located in Cyprus is subject to specific conditions;
(iii) Sum received from a person located in Cyprus is deemed to be the income of the assessee unless the assessee satisfactorily explains the source of such money in the hands of the payer;
(iv) Payments to persons located in Cyprus is liable for TDS at 30 per cent
Text of Press Release dated 01.11.2013 issued by the Ministry of Finance:
Cyprus Notified as a notified Jurisdictional Area Under Section 94a of the Income-Tax Act,1961 ; All Parties to the Transaction with a Person in Cyprus shall be Treated as Associated Enterprises and the Transaction shall be Treated as an International Transaction Resulting in Application of Transfer-Pricing Regulations Including Maintenance of Documentations
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. As per section 94A, the Central Government may, having regard to the lack of effective exchange of information with any country or territory outside India, specify the said country or territory as a notified jurisdictional area in relation to transactions entered into by any assesse. The rules under section 94A were notified as Income-tax (8th Amendment) Rule, 2013, through S.O. 1856 (E) dated 26th June, 2013, by inserting Rule 21AC and Form 10FC in the Income-tax Rule, 1962.
India and Cyprus have entered into an agreement for avoidance of double taxation of income and prevention of fiscal evasion which is in force since 21st December, 1994. Both the Contracting States under this agreement have a legal obligation to exchange such information as is necessary for carrying out the provisions of the agreement or of domestic laws of the Contracting States, in particular for the prevention of fraud or evasion of taxes.
Since Cyprus has not been providing the information requested by the Indian tax authorities under the exchange of information provisions of the agreement, it has been decided to notify Cyprus as a notified jurisdictional area under section 94A of the Income-tax Act, 1961 through Notification No. 86/2013 dated 1st November, 2013 published in Official Gazette through SO 4625 GI/13.
The implications of such a Notification are summarized as under:
– If an assessee enters into a transaction with a person in Cyprus, then all the parties to the transaction shall be treated as associated enterprises and the transaction shall be treated as an international transaction resulting in application of transfer-pricing regulations including maintenance of documentations [Section 94A(2)].
– No deduction in respect of any payment made to any financial institution in Cyrus shall be allowed unless the assessee furnishes an authorization allowing for seeking relevant information from the said financial institution [Section 94A(3)(a) read with Rule 21AC and Form 10FC].
– No deduction in respect of any other expenditure or allowance arising from the transaction with a person located in Cyprus shall be allowed unless the assessee maintains and furnishes the prescribed information [Section 94A(3)(b) read with Rule 21AC].
– If any sum is received from a person located in Cyprus, then the onus is on the assessee to satisfactorily explain the source of such money in the hands of such person or in the hands of the beneficial owner, and in case of his failure to do so, the amount shall be deemed to be the income of the assessee [Section 94A(4)].
– Any payment made to a person located in Cyprus shall be liable for withholding tax at 30 per cent or a rate prescribed in Act, whichever is higher [Section 94A(5)].
Press release dated 07.11.2013 issued by the Finance Ministry of Cyprus in response
The Ministry of Finance of the Republic of Cyprus wishes to state that:
“The Ministry of Finance of the Republic of India has issued a press release on November 1st, 2013 stating that it has taken the decision to notify Cyprus as a notified jurisdictional area under section 94A of the Income-tax Act, 1961. The Ministry of Finance of the Republic of India has taken the above unilateral measure, considering that in their view the information provided by the competent authorities of the Republic of Cyprus, under the existing Double Tax Treaty between Cyprus and India did not adequately address the inquiries of the relevant authorities of the Republic of India. It is important to clarify that the Double Tax Treaty between the two countries has not been terminated.
Given the fact that Cyprus attaches primary importance to the implementation of its contractual obligations stemming from Bilateral and International Agreements, and paying due respect to the excellent level of its political relations with the Government of India, the Cyprus Government is in direct contact with the Indian Government and is exerting every effort to clarify and resolve the situation that has been created and has directly affected the business communities in both countries.
It is the position of the Cyprus 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.
The Government of the Republic of Cyprus reiterates its commitment to hold direct negotiations with the Government of the Republic of India with the aim of finalising the long pending review of the Double Tax Treaty between Cyprus and India.”