Vikas Vasal: A revolution in the making

Information exchange agreements between governments are potent tool in crackdown on tax arbitrage

The global financial meltdown of 2008 has had severe after-effects, impacting millions of people across the world, and leading to erosion of household wealth, job losses, challenges faced by sovereign nations in meeting their debt obligations, and so on. There is however one positive outcome as well: It brought the issue of “tax transparency” to the forefront. Governments across the globe came under pressure to support, through various social welfare measures, those of their people who were hit by the downturn. Therefore, to augment their revenues, governments were forced to evaluate existing and new sources of revenue.

In this process, individual and collective measures were taken by governments across the globe to usher in a new era of information sharing to increase revenue collections through various measures such as changes in their domestic tax laws and other regulations, and implementation of Base Erosion & Profit Shifting (BEPS) guidelines.

It has been globally acknowledged that tax jurisdictions with zero or near-zero tax regimes have led to distortions in the global tax system, depriving other tax jurisdictions of their legitimate tax revenues. The issue gets further complicated with taxpayers using sophisticated multi-layered structures for investment and business transactions. Recent press and web releases about data leakages from some of these jurisdictions have again brought the issue of tax transparency into the limelight.

Black money or the black economy in India is a topic that has been discussed for the last several decades. In the recent past, however, it has become a topic of national concern, with the media and citizens alike vociferously taking it up at various forums. While combating the domestic black economy is not an easy task, it is even more cumbersome where overseas tax jurisdictions are involved, especially those that have secrecy laws, porous regulations and easier mechanisms through which to obtain favourable rulings.  

The Union government had released a “White paper on black money”, which highlighted that increased globalisation and relaxation of control over foreign exchange provides taxpayers greater opportunities for tax evasion. It further mentioned that while taxpayers operate globally, tax administrators remain confined to their respective jurisdictions. Thus, to effectively tackle tax evasion, it is imperative that tax administrators cooperate with each other. A key element of such international cooperation in tax matters is through the exchange of information mechanisms established by countries.

Obtaining information, corroborating evidence, and finally the trial in a court are generally long, tedious and time-consuming processes in India. Besides, one of the key handicaps that Indian authorities have been facing is the lack of formal legislative mechanisms and processes through which they could obtain information from overseas tax jurisdictions.  

A country can request information from another country under the Double Taxation Avoidance Agreement (DTAA) entered into between them. In the absence of a DTAA between the two tax jurisdictions, information can be sought under Tax Information Exchange Agreements (or TIEA), which have evolved into an efficacious alternative to DTAAs for exchange of information. 

Accordingly, India has taken steps to re-negotiate its DTAAs with other countries to strengthen exchange of information. For instance, India has re-negotiated its tax treaties with Japan, Mauritius, New Zealand and Cyprus, among other countries.

The process of entering into TIEAs, which started in 2010, has now picked up steam, with more than a dozen such agreements being signed in the recent past — including with Bermuda, Bahamas, Bahrain, Belize, British Virgin Islands, Cayman Islands, Guernsey, Gibraltar, Isle of Man, Jersey, Liberia, Macau SAR, Maldives, Principality of Liechtenstein, San Marino, Seychelles and Saint Kitts & Nevis.

Further, in order to give effect to the BEPS recommendations of the Organisation for Economic Cooperation and Development, countries had to modify their bilateral tax treaties entered into earlier, which is a tedious and time-consuming process. Therefore, a more practical and effective approach of agreeing on terms through a Multilateral Instrument has been adopted, whereby member countries, including India, would agree to and adopt certain basic covenants to give effect to BEPS, and obviate the need to amend each and every bilateral treaty independently. This would be a significant step at a global level to further bring in tax transparency through a single platform.

India has been actively seeking to tax off-shore wealth. It has not only been party to international developments, but has also taken steps like introduction of The Black Money (Undisclosed Foreign Income and Asset) and Imposition of Tax Act, 2015. In a significant move, India has recently signed a “Joint Declaration” with Switzerland for the implementation of automatic exchange of information between the two countries. As a result, it will be possible for India to receive, from September 2019 onwards, financial information relating to accounts held by Indian residents in Switzerland for 2018 and subsequent years, on an automatic basis. 

While demonetisation may be the talk of the town these days, there is a silent revolution taking place, whereby Indian revenue authorities are significantly adding strength to their armoury through TIEAs and similar other measures, which would yield results in the near future, with information from overseas tax jurisdictions becoming easily available, unlike in the past. 

The writer is Partner, Grant Thornton India LLP. This article has been written with assistance from Gaurav Mittal, a chartered accountant