Cyprus can help India attract FDI
Article as appeared on Times of India website - September-October 2012:
The Indian economy continues to be one of the two fastest growing economies in the world.
The Consolidated Foreign Direct Investment Policy of the Government of India, is a very strong statement that India has a clear objective to attract and promote Foreign Direct Investment (FDI) in order to supplement domestic capital, technology and skills, for accelerated growth.
There is no doubt that India is a very attractive investment proposition for foreign investors. At the same time, investors look for ways to legitimately maximise their after tax returns, especially in emerging market economies, where the risks associated with their investments are perceived to be significantly higher.
The current India-Cyprus double tax treaty provides investors with the necessary comfort to invest into India in a tax efficient way and forms the basis for FDI into India and Indian outbound investments, putting Cyprus amongst the Top 7 investor countries into India.
In the age of transparency, the provisions of the treaty need to be amended and modernised via a protocol, thereby ensuring that the provisions with regards to (a) exchange of information and (b) assistance in the collection of taxes, are in accordance with the OECD model treaty, standards and guidelines. Cyprus should be positive in welcoming such provisions in the treaty.
Some circles have advocated for an amendment to the capital gains article in a way that India would have the right to tax gains made on the disposal of shares in Indian companies by a Cyprus tax resident. The rational is that the Indian tax authorities will collect taxes for transactions that concern Indian assets. This could have been a fair argument but for the fact that India has other treaties which provide that such gains are not taxed in India but in the country of residence of the seller.
Therefore, if the capital gains tax article in the India-Cyprus treaty is amended in order to give taxing rights to India, without having amended India's other treaties, the investors would simply invest into India via the other jurisdictions and the Indian tax authorities would still not collect any taxes on these transactions. In an extreme case, if the investor is not comfortable with investing via jurisdictions outside the EU, they may even decide to place their investment in other emerging markets.
India and Cyprus have always been friendly countries and this was demonstrated a number of times in the past. As a testament to that, Nicosia, the capital of Cyprus, has streets and monuments named after Mahatma Gandhi, Jawaharlal Nehru and Indira Gandhi.
India needs significant FDI over the next few years and its policies reflect its desire to attract foreign investors. Cyprus, a well regulated EU member state, on the OECD white list, with a tax system that conforms with EU law and the EU code of conduct, an existing very good double tax treaty with India and a friendly country to India, provides comfort to foreign investors to set up their business in Cyprus and carry out their investments into India from Cyprus.
By signing a new protocol to modernise the exchange of information and assistance in the collection of taxes articles and therefore provide necessary transparency, Cyprus can be a Gateway to India for foreign investors and similarly be India's Gateway to the rest of the world.
The India - Cyprus double tax treaty, with the introduction of the above suggested provisions will continue to provide investors with the necessary comfort about their investments, ensure legitimate investments into India and assist India achieve its FDI policies and growth targets"