How Does The Income Tax Department Collaborate With Foreign Tax Agencies?

With increasing globalization, tax evasion has become a cross-border challenge. The Income Tax Department of India collaborates with foreign tax agencies to detect tax fraud, prevent money laundering, and curb black money. This collaboration is facilitated through international treaties, automatic information exchange programs, and investigative cooperation.

How the Income Tax Department Collaborates with Foreign Tax Agencies:

1. Automatic Exchange of Information (AEOI) Under CRS

India follows the Common Reporting Standard (CRS) developed by the OECD (Organisation for Economic Co-operation and Development).

Banks and financial institutions in over 100 participating countries share financial account details of foreign nationals to detect tax evasion.

2. Double Taxation Avoidance Agreements (DTAA)

India has signed DTAA with over 90 countries to prevent tax evasion and double taxation.

This allows India and foreign tax authorities to exchange financial details of taxpayers to track unreported income.

3. FATCA (Foreign Account Tax Compliance Act) Compliance

Under FATCA (signed between India and the U.S.), Indian banks report financial details of U.S. taxpayers to the IRS (Internal Revenue Service), and vice versa.

This helps prevent offshore tax evasion by ensuring that U.S. citizens do not hide income in Indian banks.

4. Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC)

India is a signatory to the OECD’s MAC treaty, allowing authorities to request financial data, conduct joint audits, and assist in tax investigations across borders.

This is useful in cases of money laundering, shell companies, and tax fraud.

5. Tax Information Exchange Agreements (TIEA)

India has TIEAs with several tax havens, including Cayman Islands, Bermuda, and the British Virgin Islands, to uncover hidden offshore assets and black money.

These agreements enable on-demand financial data sharing, helping Indian authorities track tax evaders.

6. Investigation and Joint Audits

Indian tax authorities work with agencies like the IRS (USA), HMRC (UK), ATO (Australia), and European tax bodies to conduct joint tax audits on multinational companies.

This helps prevent profit shifting, transfer pricing fraud, and corporate tax avoidance.

7. Enforcement Through Black Money and Benami Laws

India’s Black Money (Undisclosed Foreign Income and Assets) Act allows authorities to track and penalize undeclared foreign assets.

The Benami Transactions Act helps investigate illegal foreign property holdings using information from foreign tax agencies.

Example:

A high-net-worth Indian citizen hides undeclared income in Swiss bank accounts to evade taxes. Here's how foreign collaboration helps:

• Under CRS, Swiss banks report account details to the Indian Income Tax Department.
• Through DTAA, Indian authorities officially request financial statements from Swiss tax authorities.
• If tax evasion is confirmed, the individual is penalized under India’s Black Money Act.
• Legal action is taken, and the individual is required to pay taxes, penalties, and may face prosecution.