Tax transparency is the new reality

Tax transparency is the new reality for India, as the government has realised the urgent need to tackle black money. Internationally, the move towards tax transparency began in early 2000 and OECD's Global Forum Working Group on Effective Exchange of Information released an ‘Agreement on exchange of information on tax matters' in April 2002.

Tackling black money

On the legislative front, India has adopted a three-pronged approach to tackle black money. First, it has completed negotiation of Tax Information Exchange Agreements (TIEAs) with 16 tax havens. Second, it has initiated the process of negotiation with 75 countries to broaden the scope of the ‘Exchange of Information' Article in Double Tax Avoidance Agreements (DTAAs), either by way of protocols to existing DTAAs or new DTAAs.

As of September, negotiations/renegotiations with 40 countries were completed. Third, section 94-A of the Income-tax Act, 1961, now empowers the Government to notify any territory outside India, having regard to lack of effective exchange of information, as a notified jurisdictional area. In simple terms, transactions with residents of such territories are subject to higher withholding, certain disallowances and also subject to transfer pricing regulations. Several countries have pressurized Switzerland to be more tax transparent. According to OCED's statistics, Switzerland has signed 91 DTAAs providing for the exchange of information. The protocol amending the India-Swiss DTAA was signed on August 30 last year and approved by the Swiss Parliament on June 17, 2011. The 100-day waiting period for ratification has recently ended. This enables India to obtain information from Switzerland in specific cases, for a period starting from April 1, 2011.

Overview in the Swiss context

For long Switzerland did not accept a full exchange of information clause. However, international pressure and the need to upgrade to OECD's G-20 white list led to a rethink. Its Federal Council on March 13, 2009, made the historic announcement that Switzerland intends to adopt the OECD standard on administrative assistance in tax matters. This decision permitted the exchange of information with other countries in individual cases, where a specific and justified request was made and Switzerland began negotiations on revising its DTAAs.

Protocol to the DTAA

The amending protocol to the India-Swiss DTAA has replaced Article 26 and has introduced a new paragraph 10 to the protocol. The India-Swiss DTAA now enables India to obtain information that is foreseeably relevant to the administration and enforcement of Indian Income taxes. India can now approach Switzerland for information, but only after it has exhausted all normal procedures under its domestic law to obtain such information. While it is intended to provide for exchange of information to the widest possible extent, it does not allow fishing expeditions or request for information that is unlikely to be relevant to the tax affairs of a given tax payer. India's Competent Authority needs to provide various information to the Swiss competent authorities when making such requests, which include the name of the person/s under examination, the period for which the information is required, a statement of information sought including the nature and format in which it is sought, the tax purpose for which the information is sought and also the name of any person believed to be in possession of such information.

The India-Swiss DTAA expressly provides that the administrative procedure rules regarding taxpayers' rights remain applicable before information is transmitted. The Swiss domestic law also provides for procedural rights for protecting the interest of the tax payers. Thus, before any information can be exchanged, the tax payer will first be informed of, then has the right to be heard on and finally has the right to object to (and eventually appeal before the Swiss Federal Administrative Court) on the decision made by the Swiss Federal Tax Administration to exchange information. Further the India-Swiss DTAA does not commit Switzerland to exchange information on an automatic or spontaneous basis.

(The author is Tax Partner, Ernst & Young. )