Exchange of Information Indian legal perspective

1. Exchange of InformationIndian legal perspective 6th Asia / Africa IFA Conference Mauritius May 11, 2012 Mahesh Kumar Senior Associate, Nishith Desai Associates Assisted by Professor Roy Rohatgi Nishith Desai Associates Legal & Tax Counseling Worldwide Mumbai | Silicon Valley | Bangalore | Singapore | Mumbai-BKC | New Delhi Mahesh Kumar/ Professor Roy Rohatgi

2. Source: Times of India ILLICCIT FINANCIAL FLOWS OF AROUND USD 500 BILLION Mahesh Kumar/ Professor Roy Rohatgi

3. Exchange of Information under DTAAs &TIEAs • 82 DTAAs in force. • Exchange of information as is necessary for carrying out provisions of DTAA. • Confidentiality of information disclosed. • Specific exclusions. • Limitations: Need for specific TIEAs. Mahesh Kumar/ Professor Roy Rohatgi

4. New provisions for Notified Jurisdictions -- Sec 94A Sec 90 (Explanation 2) enables central government to list specified countries or territories to enter into TIEA with India. April 2010 list includes Jersey – “an enabling provision” Sec 94A added in 2011 Finance Act with a tool box of counter measures on cross border transactions with notified jurisdictions without effective TIEA with India India plans to sign around 30 such TIEAs in cases of fiscal crime and in civil tax matters. Jurisdictions without TIEA will be notified under Sec. 94A of the Act as non-cooperative jurisdictions Sec 94A applicable from June 1, 2011 – “a blacklist provision” India is also renegotiating tax treaties to overcome bank secrecy rules and provision of information without domestic interest - so far completed 36 out of 65 DTAAs in the pipeline. (Some countries do not wish to provide past banking information) Mahesh Kumar/ Professor Roy Rohatgi

5. Sec. 94A – “Blacklist” provisions for notified jurisdictions (e.g. if no TIEA) Transaction deemed to be an international transaction and subject to transfer pricing rules Expense deduction on payment to any financial institution not allowed unless taxpayer provides authorisation to revenue authorities to seek relevant information Deduction for other expenses or allowance (incl depreciation) not allowed unless taxpayer maintains and provides prescribed information Any sum received requires satisfactory explanation of source of money - other wise deemed to be income Any payment by taxpayer is subject to withholding tax at prescribed rate or 30% whichever is higher. Punitive measures e.g. application of controlled foreign company rules, expense deduction rules, special tax rules and capital gains realized by nonresident entities Mahesh Kumar/ Professor Roy Rohatgi

6. TIEA – Isle of Man (October 7, 2010) – Salient features Based on international standards of transparency and exchange of information Information must be foreseeably relevant to the adminstration and enforcement of the domestic tax laws of the requesting state Must provide some minimum details about information requested to justify foreseeably relevance criteria To be treated as secret and disclosed only to specified person or authorities; provides for disclosure to other with written consent of its competent authorities Information shall be provided upon request even if not needed for own tax purposes Specific provision for providing banking and ownership information Allows exchange of past information in criminal tax matters Mahesh Kumar/ Professor Roy Rohatgi

7. Indian Policy on TIEA –Some Indian Press Comments “These agreements should ensure the actual flow of information and benefits for countries entering them to counter domestic laws on privacy protection to check tax evasion, black money and money laundering (e.g. round tripping by its residents) Improve the quality of information that is sought under TIEAs to make such agreements more meaningful e.g. to pressure tax havens into revealing more information on black money and tax evasion Allow participation in tax examinations abroad to the extent permitted under local laws, to interview individuals and examine records with prior written permission of individuals or other persons concerned (TIEA – Bahamas) Perhaps allow fishing expeditions! Mahesh Kumar/ Professor Roy Rohatgi

8. Indian Finance Minister’s Speech New Delhi – June 13, 2011 (Some comments on IFCs) Tax havens have helped individuals to park substantial undisclosed income outside their countries; hence denying legitimate tax revenues to the country – India negotiating TIEAs with tax, low tax and no tax countries Tax havens and low tax jurisdictions were important actors in the global financial crisis – tax havens and their non compliant behaviour is a matter of serious concern in protecting tax base and national security Although era of banking secrecy was over, some countries not willing to exchange past banking information They reflect the government of India’s present and future policy towards IFCs - Compliance with Indian rules can give an advantage to IFCs Mahesh Kumar/ Professor Roy Rohatgi

9. TIEAs • 13 signed (negotiations underway for several new TIEAs) • 5 currently in force • Bermuda • Bahamas • Isle of Man • British Virgin Islands • Cayman Islands Mahesh Kumar/ Professor Roy Rohatgi

10. Exchange of Information upon Request • Request by Competent Authority (CA) for specific information. • No fishing expeditions: Specific details to be provided to demonstrate foreseeable relevance of information • Information disclosure extends to: • Information held by banks, other financial institutions, and any person, including nominees and trustees, acting in an agency or fiduciary capacity • Information regarding the legal and beneficial ownership of companies, partnerships, collective investment funds or schemes, trusts, foundations and other persons • Information to be provided within 90 days. Specific difficulties, obstacles or inability to provide information to be disclosed in writing. • Specific grounds for denying request. • Confidentiality of information disclosed. Mahesh Kumar/ Professor Roy Rohatgi

11. Automatic Exchange of Information • India in favour of automatic exchange of information. • Governments to collect from financial institutions data on income, gains, and property paid to non-resident individuals, corporations, and trusts. • Data collected automatically be provided to the governments where the non-resident entity is located. • Automatic exchange of information (also called routine exchange) involves the systematic and periodic transmission of “bulk” taxpayer information by the source country to the residence country concerning various categories of income (e.g. dividends, interest, royalties, salaries, pensions, etc). • Automatic exchange can also be used to transmit other useful types of information such as changes of residence, the purchase or disposition of property, etc. Mahesh Kumar/ Professor Roy Rohatgi

12. Convention on Mutual Administrative Assistance • Ratified by India in June 2011. • First non-OECD country to become a party to the Convention. Source: OECD Mahesh Kumar/ Professor Roy Rohatgi

13. 2010 Peer Review • In 2009 India had committed to implement the agreed international standard for tax transparency and exchange of information. • DTAAs provide for effective exchange of information. • Exchange of information provisions in line with international standards. • Treaty policy complimented by wide ranging powers to request for information, search premises and seize documents. • Powers to obtain accounting records and information from banks, financial institutions, nominees, trustees, partnerships, trusts, etc. • No bank secrecy laws limiting such disclosure. • Information available regarding owners of companies, partners of general and limited liability partnerships, settlors of trusts, etc. • Entities required to maintain underlying documentation for sufficient period of time. Mahesh Kumar/ Professor Roy Rohatgi

14. Liechtenstein Controversy • 2008: CD stolen by ex-employee of Liechtenstein bank containing details of 1400 account holders. • Information supplied to German tax authorities. • 18 Indians in the list. • Liechtenstein initiated prosecution against ex-employee for violating banking secrecy laws. • India secured relevant details under EoI provisions in India – German tax treaty. • 2009: Citizen India (NGO) filed writ petition before Supreme Court to direct the Government to take legal action and recover monies / taxes. • Petitioner demands that Government disclose names of account holders and other details. • Government argues that names cannot be disclosed due to obligations under EoI provisions. Mahesh Kumar/ Professor Roy Rohatgi

15. Article 26, India - Germany Tax Treaty 1. The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the purposes of this Agreement. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by this Agreement. They may disclose the information in public court proceedings or in judicial proceedings. 2. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation: (a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State; (b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; (c) to supply information 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 (order public) Mahesh Kumar/ Professor Roy Rohatgi

16. Government’s Argument “Public court proceedings or in judicial proceedings” limited to “Proceedings in relation to tax matters” Mahesh Kumar/ Professor Roy Rohatgi

17. Supreme Court’s View “Public court proceedings or in judicial proceedings” Refers to “Court proceedings other than those in connection with tax assessment, enforcement, prosecution etc., with respect to tax matters.” Mahesh Kumar/ Professor Roy Rohatgi

18. Balancing Conflicting Rights (Disclosure & Privacy) • Fundamental right under Article 21 of the Constitution (Right to Life). • Revelation of bank account details without finding of wrongdoing violates right to privacy. • Mere fact that a citizen has a bank account in a specific jurisdiction cannot be a ground for revelation of details. • State cannot compel citizens to reveal, or itself reveal bank accounts to the public at large unless it has carried out proper investigations and established wrongdoing. Mahesh Kumar/ Professor Roy Rohatgi

19. Supreme Court’s Directions • Government to disclose details of account holders where investigations have concluded. • No disclosure required in pending investigations or where there is no evidence of wrongdoing. • Special investigation team to expeditiously conduct investigations and initiate prosecutions. • SIT to comprise senior officers of : • Department of Revenue, Ministry of Finance • Reserve Bank of India • Enforcement Directorate • Central Bureau of Investigation • Narcotics Control Bureau Mahesh Kumar/ Professor Roy Rohatgi

20. Thank You Mahesh Kumar mahesh@nishithdesai.com Nishith Desai Associates Legal & Tax Counseling Worldwide Mumbai | Silicon Valley | Bangalore | Singapore | Mumbai-BKC | New Delhi Mahesh Kumar/ Professor Roy Rohatgi