Exchange of Information under Double Taxation Avoidance Agreements

[Dheeresh Kumar Dwivedi is a lawyer at APJ SLG Law Offices New Delhi]

With globalization, India has been entering into various double taxation avoidance agreements (“DTAAs”) with the countries across the globe. This is because of the inherent advantages that DTAAs provide insofar as avoidance of double taxation, facilitation of international trade and business, and curbing the menace of tax evasion is concerned. The Government of India derives its treaty making power from Article 253 of the Constitution whereunder the Government of India can enter into treaties or conventions, both bilateral and multilateral, with various countries and supra-national organizations. Section 90 of the Income Tax Act, 1961 (the “Act”) empowers the Government of India to enter into a treaty with any other government for the avoidance of double taxation of income under the Act as well as for exchange of information for the prevention of evasion or avoidance of income tax chargeable under the Act. In exercise of the said power, the Central Government has entered into more than 100 DTAAs and more than 15 tax information exchange agreements (“TIEAs”) with various countries, primarily with the object of avoidance of double taxation and for exchange of information. Further, to bring uniformity and consistency in the double taxation regimes across the world, these DTAAs are based on the OECD Model Tax Convention on Income and Capital (“OECD Model Law”) and the UN Model Double Taxation Convention (“UN Model Law”).  

Exchange of Information under DTAAs

One of the most critical limbs of all DTAAs that India has entered into so far is the ‘Exchange of Information’ (“EoI”) clause which, inter alia, provides for smooth exchange of information between the competent authorities of the two contracting states, the object being to tackle the menace of tax evasion. This principle finds place under Article 26 of the OECD Model Law (which has been incorporated in almost all of the DTAAs that India has entered into so far, with different numberings and updated versions) which, inter alia, casts obligation on a contracting state (“Requested State”) to furnish/exchange such information as is foreseeably relevant for carrying out the provisions of the relevant DTAA or to the administration or enforcement of the domestic laws concerning taxes of every kind that can be imposed or levied on from an individual/resident of another contracting state (“Requesting State”). Further, the OECD Model Law provides the following types of Exchange of Information between the contracting states:

(a) Information upon request: This category of EOI happens on a case-to-case basis and upon specific request made by the competent authorities of the Requesting State, typically relating to an examination, inquiry or investigation of a taxpayer’s tax liability for specified tax years;

(b) Automatic exchange of information: The second category is when both the contracting states automatically exchange or share the information relating to a taxpayer’s tax liability, typically the information comprising mainly of individual cases of the same type, usually consisting of details of income arising from sources in the source country, e.g. interest, dividends, royalties, pensions etc. This type of information is typically obtained on a routine basis; and

(c) Spontaneous exchange of information: This is where the information regarding taxpayer’s liability to pay taxes is exchanged spontaneously, specifically when one of the contracting state’s tax authorities obtain information in the course of administering their own tax laws and which they believe will be of interest to another contracting state, even without the latter having asked for it.

The secrecy clause -When can the exchange of information be denied?

Barring certain well recognized exceptions, the obligation under Article 26 of the Model DTAA is absolute, and the Requested State is under obligation to furnish the information so sought.  Further, the information so received from the Requested State has to be treated as secret information by the Requesting State, and can be disclosed only to persons or authorities or courts concerned with the assessment or collection of, or the enforcement or prosecution in respect of taxation demand so made by the Requesting State, or in the court or judicial proceedings related thereto. Moreover, under no situation shall the information so received may be used for any other purpose unless the laws of the both of the States permit so.

One of the reasons why countries enter into DTAAs or any other TIEAs is to ensure that their tax payers are not liable for double taxation or not able to evade tax in their home countries and stash it away abroad, which can further be used for illegal or criminal activities or money laundering. That is the reason why the EoI clauses are so widely worded and liberally interpreted so as to reduce the incidents where information can be denied because of it being protected information (“Protected Information”) under the third paragraph of Article 26 of the OECD Model law. Thus, a Requested State may refuse to exchange an information regarding a taxpayer only if the information so sought either: (a) demands administrative measures which are at variance with the laws and administrative practice of that State, or (b) requires supply of information which is not obtainable under the laws or in the normal course of the administration of that State, or (c) the supply of which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy or ordre public. Further, courts have held that the meaning or scope of trade secret or business secret under Article 26 is considerably narrow.

Further, the Requested State may deny information sought under Article 26 of the OECD Model law if it considers the request as ‘fishing expedition’ or the information so sought is not foreseeably relevant for the taxation, or it is Protected Information. Therefore, the fundamental requirements of the EoI request that a state must bear in mind are as follows:

(a) Whether the requested information was “foreseeably relevant” for carrying out the provisions of the relevant tax treaty or the enforcement of the domestic laws of the Requesting State;

(b) A Requested State may not decline a request merely because it lacks a “domestic interest” in the information;

(c) A Requested State may not decline a request for information only because the information is held by a bank, a financial institution, or a person acting in a fiduciary capacity; and

(d) It allows the sharing of information relating to all forms of taxes, not just income tax.

However, these restrictions are very narrow and limited in scope, and they cannot come in the way of the courts of contracting states holding the information to be exchangeable under the provisions of Article 26 if the order is justified in all the circumstances of the case and that it was not contrary to public interest. Moreover, the information received from another state under Article 26 may also be disclosed in the proceedings before the Constitutional Courts, which may be for a purpose other than one stipulated in the Article 26. Furthermore, the provisions of Article 26 are prospective, and a state cannot seek information from another contracting state retrospectively, unless the relevant treaty specifically provides therefor.

Conclusion

DTAAs have become the most effective tool of combating tax evasion and money laundering, which is self-evident from ever growing numbers of DTAAs or TIEAs being entered into between various states. However, in certain cases, a contracting state might refuse to, or simply become non-cooperative in exchanging the information regarding a taxpayer of the Requesting State, because of its domestic policy or any other concern. In such a situation, Section 94A of the Income Tax Act, 1961 empowers the Government of India to notify such non-cooperative jurisdictions, and any person undertaking any transaction with a person located in such notified non-cooperative jurisdictions shall be considered as and taxed as ‘associate enterprise’ under provisions of section 92A of the Act. Such notifications overriding the provisions of a treaty entered into with another sovereign state are absolutely constitutional.  This section was inserted with the object of obtaining information for detecting offshore tax evasion and unaccounted money abroad. Hence, the section (a) provides for the application of transfer pricing regulations, (b) imposes higher withholding tax and (c) disallows deductions for payments made or deemed amounts received as income, in case the prescribed information or document is not made available to tax authorities.

– Dheeresh Kumar Dwivedi 

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