While the exchange of information article is definitely an improvement over the extant version, one should also keep in mind that Switzerland was forced by circumstances to fall in line for fear of being blacklisted. From that perspective, if we consider the revised treaty, it has to be admitted that while Switzerland has conceded a bit under the EOI article, it has extracted its pound of flesh.

Coming back to the exchange of information article, which is the main focus of the Protocol, the opposition political parties have already commented that this was a case of a sell-out by the government; that there will be no exchange of information in respect of past transactions and there won't be any automatic or spontaneous exchange of information. While, all of these may be true to some extent, one must also remember that Switzerland had traditionally very strong secrecy laws and till very recently used to carry a reservation to Article 26 of the OECDmodel.It was only recently that Switzerland agreed to remove its observation in this regard. Switzerland has since renegotiated its treaties with many other nations and notably with the USA, UK, Japan and others. It will be interesting to see if Switzerland's treaties with these countries are any different from that entered into with India.

Here, the pattern that is seen in the Swiss treaties is as follows: in the main treaty, the language is more or less the same as in the OECD MC, 2010. There are a few subtle differences though. For example, OECD MC says that Articles 1&2 do not restrict the exchange of information whereas in most of the treaties now renegotiated by Switzerland, the language is that Article 1 alone does not restrict it. The implication is that exchange of information can only be in respect of taxes specifically mentioned in Article1, which is most commonly the Income tax.

The Swiss treaties also provide that in order to obtain the requested information, the Swiss tax authorities shall have the power to enforce the disclosure of information, notwithstanding paragraph 3 or any contrary provisions in its domestic laws. This is obviously to get over any problem relating to its domestic secrecy laws.

However, the Swiss Authorities have entered into Protocols, which either elaborate upon or detract from the treaty provision as contained in the Article itself. Thus, the protocol with India mentions that:

++ Request for information can only be made once India has exhausted all normal procedures under its domestic law

++ India must provide the information relating to the name of the person under investigation and such particulars as address, date of birth, marital status, period of time for which the information is requested, the tax purpose for which the information is sought and the name and address of the person believed to be in possession of the information in Switzerland. Thus, in the case of a Bank, the name and address of the bank has to be specified. It has been clarified that the purpose of seeking the above information is to ensure that the information is ‘foreseeably relevant' and there is no ‘fishing expedition'.

++ It is then specifically mentioned that the agreement will not commit Switzerland (or India for that matter) to exchange information on an automatic or spontaneous basis.

++ It is also provided that the administrative procedure regarding the taxpayer's rights in the requesting state will have to be adhered to. In other words, the taxpayer concerned will perhaps be given a notice about the information being sought by the Swiss authorities.

There is therefore no doubt that the OECD MC on the EOI has been considerably diluted by the Protocol. However, one needs to further examine if this is the standard Swiss practice or India has got a particularly raw deal. In this backdrop, it may be interesting to examine a few other treaties that Switzerland has recently modified. If we take the case of the Switzerland- UK treaty renegotiated in 2009, we find that the amending Protocol inserted a new Article 25, which is more or less similar to the one entered into with India with the difference that in the case of the UK, the reference is to both Articles 1&2 rather than only Article 1 as in the case of India. In the case of UK also, there are similar restrictions prohibiting fishing enquiry etc., as contained in the Protocol with India.

The treaty with Japan renegotiated in 2010, contains more or less similar stipulation and restrictions with minor changes in language. However, here the treaty does not completely rule out automatic or spontaneous exchange. Instead, it is mentioned as follows:“Although Article 25A of the Convention does not restrict the possible methods for exchanging information, it shall not commit the Contracting States to exchange information on automatic or spontaneous basis.”

In case of the treaty with Japan, there is a further provision to the effect that a Contracting State may decline to supply information relating to confidential communications between attorneys, solicitors or other admitted legal representatives in their role as such and their clients to the extent that the communications are protected from disclosure under the domestic law of that Contracting State.

Coming to the treaty with the United States, the Article is differently wordedand is reproduced below:

“The competent authorities of the Contracting States shall exchange such information (being information available under the respective taxation laws of the Contracting States) as is necessary for carrying out the provisions of the present Convention or for the prevention of tax fraud or the like in relation to the taxes which are the subject of the present Convention. In cases of tax fraud, (a) the exchange of information is not restricted by Article 1 (Personal scope) and (b) if specifically requested by the competent authority of a Contracting State, the competent authority of the other Contracting State shall provide information under this Article in the form of authenticated copies of unedited original records or documents. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic law of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by the Convention. Such persons or authorities shall use the information only for such purposes. No information shall be exchanged which would disclose any trade, business, industrial or professional secret or any trade process.

2. Each of the Contracting States may collect such taxes imposed by the other Contracting State as though such taxes were the taxes of the former State as will ensure that the exemption or reduced rate of tax granted under Articles 10 (Dividends), 11 (Interest), 12 (Royalties) and 18 (Pensions and annuities) of the present Convention by such other State shall not be enjoyed by persons not entitled to such benefits.

3. In no case shall the provisions of this Article be construed so as to impose upon either of the Contracting States the obligation to carry out administrative measures at variance with the regulations and practice of either Contracting State or which would be contrary to its sovereignty, security or public policy or to supply particulars which are not procurable under its own legislation or that of the State making application.

4. The competent authorities may release to an arbitration board established pursuant to paragraph 6 of Article 25 (Mutual agreement procedure) such information as is necessary for carrying out the arbitration procedure. The members of the arbitration board shall be subject to the limitations on disclosure described in this Article.”

It can be seen that the relevant clause of the treaty with the USA also contains provision for collection of taxes, which is missing in the case of India. That apart, the two main differences are that there are no specific references to the prohibition against the so-called ‘fishing enquiries ‘as also the requirement of furnishing certain particulars to convince the Swiss authoritiesthat the requestedinformation is foreseeably relevant. This is quite apart from the special agreement just for exchanging information in respect of the account holders of the UBS Bank entered into in the year 2009.

Coming to the other aspects of the treaty with India as renegotiated, again, it seems that Switzerland has been able to extract more concession. A few provisions can be taken particular note of. The first relates to the provision relating to shipping. Switzerland is a land-locked country and is not likely to have much shipping activity. Nevertheless, some ships are registered there. In the existing treaty, the article relating to shipping is missing. In some cases, question arose as to whether the income from such ships should be taxed in India. In the case of Gearbulk AG [2009-TII-09-ARA-INTL] , the Swiss company engaged in the business of transportation of cargo, entered into a shipping contract with one USL Shipping FZE for transportation of cargo from India to China. In terms of the contract, the amount of freight for transportation of cargo from the Indian port to the Chinese port was receivable by the assessee, which had appointed one JM Baxi& Co. as its port agent in India for handling the cargo. JM Baxi also worked as a port agent on behalf of several other companies. It deposited income tax under Sec. 172 of the Act on 7.5% of the freight charges received by the assessee. It was argued that since theassessee did not have a PE in India, the income was from an international shipping business and was taxable only in the country of residence as per Art. 7 of the Tax Treaty read with Art. 22 and could not be taxed under Sec. 172 of the Act. On an application filed in this behalf, the AAR ruled that profits from international shipping business have been deliberately kept outside the ambit of the Tax Treaty and it could not be brought within the fold of Art. 22; that profitsfrom operation of ships were only a category of business profits and it could not be argued that the same was not dealt with in the treaty and since profits from operation of ships was specifically kept outside the ambit of section 7, it could not come under Art.22. Accordingly, it was ruled that the shipping profits was taxable under section 172.

This provision is now sought to be reversed by amending Articles 7&8. Article 8 which previously dealt with only air transport will now cover shipping as well.

The other important change is the introduction of a kind of anti-abuse provision in the context of Articles 10,11,12 and 22 by providing that beneficial provision in respect of dividend, interest, FTS or other income shall not apply if the same is a part of a conduit arrangement which has been defined as follows: “ The term "conduit arrangement" means a transaction or series of transactions which is structured in such a way that a resident of a Contracting State entitled to the benefits of the Agreement receives an item of income arising in the other Contracting State but that resident pays, directly or indirectly, all or substantially all of that income (at any time or in any form) to another person who is not a resident of either Contracting State and who, if it received that item of income directly from the other Contracting State, would not be entitled under a Convention or Agreement for the avoidance of double taxation between the State in which that other person is resident and the Contracting State in which the income arises, or otherwise, to benefits with respect to that item of income which are equivalent to, or more favourable than, those available under this Agreement to a resident of a Contracting State; and the main purpose of such structuring is obtaining benefits under this Agreement.”

That apart, other important aspect is the continuation of the MFN clause extracted by Switzerland to the effect that if after the date of signature of the amending protocol, India were to restrict the scope of royalties or FTS with any other OECD member, the treaty should be renegotiated to grant the same benefit to Switzerland. MFN clauses are by nature difficult to monitor and cause problems of implementation. Besides, tax treaties are bilateral agreements and are negotiated on the basis of the respective strengths of the two countries involved and not on the strength of the OECD as such. Hence, such an MFN clause is a lazy way of negotiating a treaty.

There have been cases where pension or superannuation funds have been denied benefits of the treaty on the ground that these are not liable to tax in the home country and are not covered by the definition of resident in terms of Article 4. Therefore, Article 9 of the new protocol provides that a recognised pension fund or pension scheme will be included in the term 'resident of a contracting state' under Article 4. Thus, Swiss pension funds will be treated as residents of Switzerland entitled to the treaty benefits.

The tax sparing credit available to Swiss residents in respect of certain benefits given by India has also been given a quiet burial.

In conclusion, it can be said that although India might not have done too badly in so far as the provision relating to the exchange of information is concerned, nevertheless, we could certainly have insisted on having a provision for collection of taxes since Switzerland has given similar benefits to the United States. Moreover, since we agreed to the prohibition against the so called ‘fishing expedition' as also prohibition against automatic exchange of information, we should have insisted on an MFN clause to the effect that if Switzerland in future enters into a treaty any other country, whether belonging to the OECD or not, which gives more right for information exchange, that should automatically apply to the case of the treaty with India as well.