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Context: The Cyprus Confidential investigation scrutinized 3.6 million documents in English and Greek, unveiling a detailed paper trail exposing the establishment of tax haven companies linked to wealthy and influential individuals globally.

Key points about the Cyprus Confidential investigation include:

• The investigation spans across the globe, involving entities and individuals from diverse geographic locations.
• The focus is on offshore companies, which typically refer to entities that are registered and operate in a jurisdiction other than the one where the ultimate owners reside or where the business activities primarily take place.
  • Cyprus is referred to as a "tax haven," suggesting that it provides favourable tax conditions and regulatory environments, attracting individuals and businesses seeking to optimize their tax liabilities.
• The investigation specifically targets the activities of affluent and influential figures who have utilized Cyprus as a jurisdiction for establishing companies, potentially for reasons related to tax planning, confidentiality, or other financial advantages.
• The term "paper trail" implies a documented record of transactions, decisions, and activities related to the establishment and functioning of these offshore companies. The documents may include financial records, correspondence, legal agreements, and other relevant information.
• The investigation documents are available in both English and Greek, reflecting the linguistic diversity of the records and possibly the international nature of the entities involved.
• The investigation is conducted in collaboration with the International Consortium of Investigative Journalists (ICIJ), emphasizing the global nature and significance of the findings.

Double Taxation Avoidance Agreement

• DTAA stands for Double Taxation Avoidance Agreement, which is a bilateral treaty between two countries that aims to avoid or eliminate double taxation of the same income in both countries.
• Double taxation can arise when a person or an entity is resident in one country but earns income from another country. In such cases, the income may be taxed in both countries according to their domestic laws, resulting in a higher tax burden for the taxpayer.
• India has signed DTAAs with more than 80 countries, including Cyprus, which is a small island nation in the Mediterranean Sea. Cyprus has been a popular destination for foreign investors, especially from India, due to its low tax rates, favourable business environment and strategic location.

DTAA between India and Cyprus

• The existing DTAA between India and Cyprus, which was signed in 1994, had some loopholes that allowed some investors to avoid paying taxes on capital gains arising from the sale of shares of Indian companies. Capital gains are the profits made from selling an asset at a higher price than its purchase price.
• Under the 1994 DTAA, capital gains were taxable only in the country of residence of the seller, not in the country where the asset was located. This meant that if an investor based in Cyprus sold shares of an Indian company, he or she would not have to pay any tax on the capital gains in India, as Cyprus does not tax capital gains.
• This created an opportunity for tax evasion and avoidance, as some investors routed their investments through Cyprus to take advantage of the DTAA.

India and Cyprus revised the DTAA

• India and Cyprus signed a revised DTAA in 2016, which came into effect on 1st April 2017.
• The revised DTAA introduced a source-based taxation of capital gains, which means that capital gains arising from the sale of shares of an Indian company will be taxed in India, regardless of the residence of the seller. This will ensure that India gets its fair share of tax revenue from such transactions and prevent the misuse of the DTAA.
• The revised DTAA also provides for the exchange of information between the tax authorities of both countries and assistance in the collection of taxes.
• The amendment in the DTAA with Cyprus is expected to have a positive impact on India's economy and tax administration. It will increase transparency and cooperation between the two countries and curb tax evasion and avoidance.
• It will align the DTAA with Cyprus with the international standards and best practices, such as the Base Erosion and Profit Shifting (BEPS) project initiated by the Organisation for Economic Co-operation and Development (OECD) and the G20 countries. The BEPS project aims to prevent multinational enterprises from shifting their profits to low-tax jurisdictions and eroding the tax base of other countries.

Conclusion

• The DTAA with Cyprus is an important agreement that regulates the taxation of income between India and Cyprus. The revision of the DTAA in 2016 has brought it up to date with the changing global scenario and enhanced its effectiveness and fairness. It is hoped that this will foster a stronger economic partnership between India and Cyprus and benefit both countries in the long run.

Must Read Articles:

Organisation for Economic Co-operation and Development (OECD): https://www.iasgyan.in/daily-current-affairs/organisation-for-economic-cooperation-and-development-oecd#:~:text=About%3A,and%20well%2Dbeing%20for%20all.

International Taxation: https://www.iasgyan.in/rstv/perspective-international-taxation

PRACTICE QUESTION Q. How do Double Taxation Avoidance Agreements (DTAA) contribute to fostering international trade and investment, and what key considerations should countries take into account when negotiating and implementing these agreements?