Financial Transparency Coalition

The Central Board of Direct Taxes (CBDT) in India brought out a manual on exchange of information in January 2013, including automatic exchange of information, one of the Task Force’s five recommendations. Although this Manual was released to provide guidance to Investigating Officers explaining various provisions and for making requests to countries, it is pertinent to note some of the discussion which is of relevance particularly for automatic exchange of tax information.

The Manual notes that exchange of information mechanism is mainly through  double taxation avoidance agreements (DTAAs), tax information exchange agreements (TIEAs) and multilateral agreements for exchanging information. It confirms that global efforts towards information exchange has resulted in many countries/jurisdictions co-operating to exchange information and that most of India’s 84 treaty partners exchange or are willing to exchange information on automatic basis and spontaneously although, ‘it is not mandatory as per the provisions of the DTAAs/TIEAs and is not considered as part of the international standards on transparency and exchange of information for tax purposes’.

Without mentioning any specific countries/jurisdictions, the Manual also states that there are still some treaty partners that have reservations to exchange information automatically and that Government of India is making efforts at bilateral levels and global forums,

To make the exchange of information on automatic basis as part of the global standards’. Noting that TIEAs only cover information exchange on request, it states that ‘Automatic Exchange of Information is one of the most effective ways to improve voluntary tax compliance and decrease the incidence of tax evasion.

The Multilateral Convention on Mutual Administrative Assistance in Tax Matters also finds strong support as an instrument for receiving administrative assistance from foreign jurisdictions having a wider scope than DTAAs and TIEAs as it includes exchange of information on request, automatic exchange of information, spontaneous exchange of information, simultaneous tax examinations, tax examination abroad, assistance in recovery, service of documents etc. The Convention also extends the benefit of information exchange with partners that India does not have a treaty with. The Manual advocates the strengthening of this Convention and ensuring all jurisdictions sign it by citing the following line from the G20 meeting in Los Cabos, Mexico, in 2012 (apparently added on India’s insistence as per the Manual):

We welcome the OECD report on the practice of automatic information exchange, where we will continue to lead by example in implementing this practice. We call on countries to join this growing practice as appropriate and strongly encourage all jurisdictions to sign the Multilateral Convention on Mutual Administrative Assistance.

In terms of the number of pieces of information received on an automatic basis by India, the Manual notes that it was quite small initially but has been increasing recently.

While the information received has been in different formats and some of them not usable, it notes that the officials have been able to use some of this information to identify cases of tax evasion. In terms of information sent by India, India has transmitted about 2 million pieces of information relating to F.Y. 2009-10, 2010-11 and 2011-12 to more than fifty of its treaty partners.

It further notes that as automatic exchange of information becomes more popular, the following challenges would need to be addressed:

• Standardization of the format in which information is exchanged between countries. The OECD has been working on this standardization and has prescribed an advanced standard using XML language (STF Format).
• Sending information available with Indian tax administration to foreign jurisdictions in the standard format of STF.
• Secured and standard platform for transmission of data between different countries and also from the Competent Authority to the field units
• Matching of the data received from the foreign jurisdictions with India’s own database and populating the PAN database with the information received
• Carrying out risk assessment and identifying the cases for scrutiny
• Feedback on utilization of information including additional revenues generated

While Government of India’s support for automatic exchange of information has been known, it is important to note the strong support for automatic exchange through the multilateral approach considering the developments around FATCA and EUSTD (neither of which find a mention in the Manual). It is pertinent to note here that the OECD and Council of Europe developed a Protocol amending the multilateral Convention on Mutual Administrative Assistance in Tax Matters to bring it in line with the international standard on exchange of information for tax purposes and to open it up to all countries in response to the G20 call for action in 2009 “to make it easier for developing countries to secure the benefits of the new co-operative tax environment, including a multilateral approach for the exchange of information”.

While the Multilateral Convention is still not considered the ideal instrument for automatic information exchange, does the increased focus on FATCA and EUSTD mean that developing countries would have to negotiate with the US and EU to truly benefit from automatic information exchange? If so, what does that mean for developing countries that do not have the political leverage to negotiate this? What is unclear is if FATCA and EU directives mean that there will now be greater support for a multilateral approach to automatic information exchange that benefits all countries, especially developing countries or if the political momentum towards the multilateral approach will decline.