Welcoming the G20 pact on exchange of information to curb tax evasion, India on Monday urged all nations to join the pact but expressed reservations about the mandatory arbitration in the Mutual Agreement Procedure (MAP) of tax treaties saying it not only “impinges” on the sovereign rights of developing countries in taxation but also limits the ability of developing countries to apply their domestic laws for taxing non-residents and foreign companies.

On MAP, she said one of the major concerns from the point of view of developing countries is the approach adopted for making dispute resolution mechanisms more effective by including mandatory and binding arbitration procedure in the MAP. This means in case of disputes between the tax authorities of countries where an MNC is present, the share of income to be taxed in each country will be determined through arbitration the outcome of which would be binding on everyone..

“This not only impinges on the sovereign rights of developing countries in taxation, but will also limit the ability of the developing countries to apply their domestic laws for taxing non-residents and foreign companies,” she added.

Last week, finance ministers of the top 20 economically powerful nations agreed on a the new global standard on automatic exchange of information, which would enable the tax authorities, of both developed and developing countries, to receive information about taxpayers hiding their money in offshore financial centres and tax havens through multi-layered entities with non-transparent ownership, on an automatic basis. “This would be the key to prevent international tax evasion and avoidance and would be instrumental in getting information about unaccounted money stashed abroad and ultimately bringing it back,” minister of state for finance Nirmala Sitharaman said at the G20 finance ministers meet in Cairns, Australia.

One of the first steps taken by the new Government headed by Prime Minister Shri Narendra Modi is constitution of a Special Investigation Team (SIT) to examine all the issues in this regard and thus this is a cause which is very dear to us, she said.

“We believe that as far as possible, the new global standards on automatic exchange of information should be implemented with a common timeline with coverage of as many countries as possible. In addition to providing a critical mass to the success of the new standard, this would also be cost effective for financial institutions. 46 countries, including India, have agreed for a common timeline to exchange information automatically from 2017 and we call upon everybody to join us,” she said.

Outlining the need that the exchange of information on automatic basis under the new global standard is to be on a fully reciprocal basis as should be the arrangement between sovereign countries, she said “we therefore call upon countries to make necessary legislative changes in their domestic laws so as to enable them to provide the same level of information to other countries as they would be receiving from those countries.”