- November 15, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Section :Places in news
Context: Cyprus Confidential
More about the news:
- Cyprus Confidential” is a comprehensive offshore investigation featuring 3.6 million documents in English and Greek.
- It unveils a detailed paper trail of companies established in the tax haven of Cyprus by influential individuals globally.
- In collaboration with the International Consortium of Investigative Journalists (ICIJ), over 270 journalists from 60 media outlets in 55 countries participated in the investigation.
- The documents, obtained from six offshore service providers in Cyprus, reveal insights into Indian investors acquiring Cypriot citizenship through the Golden Passport scheme and showcase entities formed by prominent businesses to leverage Cyprus’s favorable tax regime in the Eastern Mediterranean.
What are Tax Havens.
- A tax haven is a country that offers foreign businesses and individuals minimal or no tax liability for their bank deposits in a politically and economically stable environment.
- Usually, countries engage in upholding such a low rate of taxation in order to increase foreign investment as well as the cash flow in their economy.
What is the Tax Haven Criteria by OECD.
- The Organization for Economic Co-operation and Development (OECD) outlines four crucial criteria to assess if a jurisdiction qualifies as a tax haven:
- Imposition of no or minimal taxes.
- Lack of transparency.
- Presence of laws or practices hindering effective information exchange for tax purposes.
- Absence of a requirement for substantial economic activity.
What are the various type of tax heavens:
- Pure Havens: No charges on Income or Capital gains like, Bermuda, Cayman Islands, Vanuatu.
- Tax Havens with low state-approved rates through international tax agreements like Liechtenstein, Switzerland, Republic of Ireland.
- Tax Havens exempting taxpayers from cross-border transaction taxes like Costa Rica, The Philippines, Panama.
- Tax Havens favoring offshore and holding companies like Austria, Luxembourg, Thailand.
- Tax Havens granting exemptions for export-oriented industries like Ireland, Madeira in Portugal.
- Tax Havens offering benefits to ‘Offshore Companies’ like Bahamas, Antigua & Barbuda, British Virgin Islands.
- Tax Havens providing privileges to banking or financial firms in offshore activities like Anguilla, Grenada, Jamaica.
Issues related to Taxation around the world
Cyprus Confidential: Unveiling Offshore Strategies
- Investigation Overview:
- 6 million documents in English and Greek.
- Collaboration with ICIJ, involving 270+ journalists from 60+ media houses globally.
- Reveals offshore companies in Cyprus used by global elite.
- India Investigation Highlights:
- Secrecy Unveiled: Lifts secrecy veil for government and regulatory agencies.
- Control from India: Documents reveal offshore entities controlled from India.
- Setting Up Offshore Entities in Cyprus:
- Legal Perspective: Not illegal; India has double-taxation avoidance agreements.
- Tax Residency Certificates: Used for legal tax benefits.
- Regulatory Oversight: Generally characterized by lax oversight and strong secrecy laws.
- Evolution of India-Cyprus Tax Treaty:
- Pre-2013: Exemption from capital gains tax.
- Since 2013:Cyprus labeled Notified Jurisdictional Area (NJA).
- Since 2016: Revised DTAA signed, rescinding NJA status.
- Tax Benefits in Cyprus:
- Tax Rates:25% for offshore companies.
- Dividends and Profits: No withholding tax, exempt from additional tax.
- Capital Gains and Estate Duty: No tax on sale of shares, no estate duty.
- India-Cyprus DTAA Dynamics:
- Tax Planning Hub:Cyprus used for tax planning due to low tax regime.
- Alternative to Mauritius: Cyprus becomes an alternative for offshore investments in India.
- Offshore Trusts in Cyprus:
- Definition: Trusts with property and income outside Cyprus.
- Tax Exemptions: Exempt from estate duty; no tax on income and gains.
- Confidentiality: No registration, maintains beneficiary confidentiality.
- Challenges for Indian Tax Authorities:
- DTAA Limitations: Does not prevent scrutiny if transactions aimed solely at tax avoidance.
- Tax Treaty Benefits Denial: Possible if ownership setup solely for tax avoidance.
Offshore Leaks to Cyprus Confidential: A Decade of Investigations
- Offshore Leaks (2013):5 million documents, 612 Indians exposed.
- Swiss Leaks (2015): HSBC’s Swiss private banking leaks, 1,195 Indian clients.
- Panama Papers (2016):5 million files exposing shell entities for fraud, tax evasion.
- Paradise Papers (2017):4 million files revealing tax avoidance structures, India control.
- Mauritius Leaks (2019): Exposing tax avoidance via Mauritius by multinational companies.
- FinCEN Files (2020): Revealing suspicious activity reports filed by global banks.
- Pandora Papers (2021): Exposing offshore structures for estate planning, global elite.
- Cyprus Confidential (2023):6 million documents unveiling offshore strategies in Cyprus.
Double Taxation Avoidance Agreement (DTAA):
- DTAA is a tax treaty between two or more countries, including India, designed to prevent taxpayers from being taxed twice on the same income—once in the source country and again in the residence country.
- Aims to eliminate or reduce the instances of double taxation, providing clarity on tax liabilities for individuals and businesses operating in multiple countries.
- Bilateral Agreements:
- Countries enter into bilateral agreements to address issues related to cross-border taxation, ensuring fair treatment of taxpayers and fostering international economic cooperation.
- Income Tax Avoidance:
- DTAA facilitates the avoidance of income tax duplication by specifying the rules for allocating taxing rights between the source and residence countries.
Permanent Normal Trade Relations (PNTR):
- PNTR is a legal status in the United States denoting a country’s eligibility for free trade relations on a permanent basis. It is essentially the same concept as Most Favoured Nation (MFN) status.
- Free Trade Designation:
- Indicates that a foreign nation is granted the same trade privileges and terms as the most favoured trading partner, ensuring equal and non-discriminatory treatment.
- Equivalent to MFN:
- In the U.S. context, PNTR is equivalent to the international concept of Most Favoured Nation, emphasizing fairness and equality in trade relations.
- PNTR status is often granted through specific legislation, signaling a commitment to open and unrestricted trade with the designated nation.
- China and PNTR:
- A notable example is the S. granting PNTR status to China, a move that normalized trade relations and played a role in China’s accession to the World Trade Organization (WTO).
- Benefits of PNTR:
- Provides stability and predictability in trade relations, encouraging economic cooperation and facilitating the growth of international commerce.
- Trade Promotion:
- PNTR status is seen as a means of promoting global trade, reducing trade barriers, and fostering positive diplomatic and economic ties between nations.
Most Favoured Nation (MFN) in International Trade:
- MFN is a principle in international trade ensuring equal and non-discriminatory treatment among trading partners.
- When a country grants MFN status to another, it commits to providing the same trade privileges and terms to that partner as its most favoured trading partner.
- Equal Treatment:
- For instance, if Country A grants MFN status to Country B, it must extend the same trade benefits to Country B as it does to its best trading partner, Country C.
- International Agreements:
- Article 1 of the General Agreement on Tariffs and Trade (GATT) 1994, under the World Trade Organization (WTO), mandates member countries to grant MFN status to each other.
- While the MFN principle is generally upheld, exceptions exist, such as bilateral trade agreements and special access provisions for developing nations.
- India-Pakistan Example:
- India initially granted MFN status to all WTO members, including Pakistan. However, in 2019, India suspended Pakistan’s MFN status citing security concerns, and Pakistan did not reciprocate the status for India.
Tax evasion is the illegal practice of not paying owed taxes to the government through fraudulent means, such as underreporting income, utilizing offshore accounts, or inflating deductions to decrease tax liability.
A tax haven is a jurisdiction or country that offers favorable tax rates and other financial benefits to individuals and businesses, attracting them to establish residency or conduct financial activities to minimize their tax liability.
Automatic Exchange of Information:
Introduced to combat offshore tax evasion by wealthy individuals, promoting transparency and information sharing among countries.
Base Erosion and Profit Shifting (BEPS):
BEPS, coined by OECD, refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations, thus eroding the tax base of the higher-tax jurisdictions.
A shell company is a business entity without active business operations or significant assets. Often, it exists only on paper and is used for various financial purposes, including reducing tax liability, avoiding regulations, or conducting financial transactions anonymously.
P-Notes (Participatory Notes):
Participatory Notes are financial instruments used by investors to invest in Indian securities without direct registration with regulatory authorities. They are issued by registered foreign institutional investors (FII) to overseas investors, providing an indirect route to participate in the Indian stock market, especially in the context of international finance and taxation.
Roundtripping is a financial practice where funds are routed, often through a series of transactions or intermediary entities, to conceal the original source of the funds.
This can involve sending money offshore and then bringing it back through a complex route to make it appear as if it’s a legitimate investment.