The Government of India, Ministry of Finance had on August 7, 2015, in order to comply with the information reporting requirements of the US' Foreign Account Tax Compliance Act (hereinafter referred to as 'FATCA'), made amendments in the Income-tax Rules, 1962.
WHAT IS FATCA'S BACKGROUND?
FATCA is a broad set of rules designed by the Government of US to increase tax compliance by Americans with financial assets held outside the United States. FATCA legislation defines foreign financial institutions in such a way, that it includes every conceivable kind of financial institution outside the U.S. This includes banks, brokerage firms, insurance companies, trust companies, retirement plan administrators, mutual fund companies, etc.
U.S. financial institutions (USFIs) and other types of U.S. withholding agents are required to withhold 30% on certain U.S. source payments made to foreign entities, if they are unable to document such entities for purposes of FATCA. Also, the Foreign Financial Institutions (FFIs) that enter into an agreement with the US' Internal Revenue Service (IRS) to report on their account holders may be required to withhold 30% on certain payments to foreign payees if such payees do not comply with FATCA.
Reporting is mandated on "U.S. Persons." This broad category includes U.S. citizens, U.S. residents, green card holders as well as trusts controlled by U.S. Persons. The United States collaborated with other governments to develop two model intergovernmental agreements (IGAs) to implement FATCA. All IGAs contemplate that a partner government will require all Foreign Financial Institutions (FFIs) located in its jurisdiction (that are not otherwise exempt) to identify U.S. Accounts and report information about U.S. Accounts.
PROVISIONS UNDER INDIAN LAWS
1. On July 9, 2015, the two countries (India and US) have signed an agreement to share financial information about their residents to avoid tax evasion. The agreement, signed between India's Income tax Department and US' Internal Revenue Service (IRS), will be operational from September 30;
2. On August 7, the Central Board of Direct Taxes (CBDT), framed rules for the Indian financial Institutions to ensure that the disclosures and maintenance of information are implemented in a systematic form. The Central Government with respect to registration of persons, due diligence, maintenance of information and for matters relating to statement of reportable accounts, amended Income tax Rules, 1962, by inserting Rules 114F, 114G and 114H. The rules so framed are called the Income tax (11th Amendment) Rules, 2015.
SOME PROVISIONS OF THE RULES HAVE BEEN OUTLINED IN BRIEF:
3. The 'Reporting Financial Institutions (RFIs)' are required to maintain and report certain informations regarding reportable account. A RFI means-
(a) a financial institution (other than a nonreporting financial institution) which is resident in India, but excludes any branch of such institution, that is located outside India; and
(b) any branch, of a financial institution (other than a non-reporting financial institution) which is not resident in India, if that branch is located in India;
A reportable account shall mean a financial account as identified pursuant to the due diligence procedures provided under the Rules.
4. "non-reporting financial institution" means any financial institution that is,-
(a) a Governmental entity, International Organisation or Central Bank, other than with respect to a payment that is derived from an obligation held in connection with a commercial financial activity of a type engaged in by a specified insurance company, custodial institution, or depository institution;
(b) a Treaty Qualified Retirement Fund; a Broad Participation Retirement Fund; a Narrow Participation Retirement Fund; or a Pension Fund of a Governmental entity, International Organization or Central Bank;
(c) a non-public fund of the armed forces, Employees' State Insurance Fund, a gratuity fund or a provident fund;
(d) an entity that is an Indian financial institution only because it is an investment entity, provided that each direct holder of an equity interest in the entity is a financial institution referred to in sub-clauses (a) to (c), and each direct holder of a debt interest in such entity is either a depository institution (with respect to a loan made to such entity) or a financial institution referred to in sub-clauses (a) to (c);
(e) a qualified credit card issuer;
(f ) an investment entity established in India that is a financial institution only because it,-
(I) renders investment advice to, and acts on behalf of; or
(II) manages portfolios for, and acts on behalf of; or
(III) executes trades on behalf of, a customer for the purposes of investing, managing, or administering funds or securities deposited in the name of the customer with a financial institution other than a non-participating financial institution;
(g) an exempt collective investment vehicle;
(h) a trust established under any law for the time being in force to the extent that the trustee of the trust is a reporting financial institution and reports all information required to be reported under rule 114G with respect to all reportable accounts of the trust;
(i)a financial institution with a local client base;
(j) a local bank;
(k) a financial institution with only low-value accounts;
(l) sponsored investment entity and controlled foreign corporation, in case of any U.S. reportable account; or
(m) sponsored closely held investment vehicle, in case of any U.S. reportable account.
[Note: The above terms defining non-reporting financial institutions are further explained in the Rules for better understanding.]
5. The informations to be maintained and reported by a reporting financial institution regarding reportable accounts are as follows:
a) the name, address, taxpayer identification number and date and place of birth (in the case of an individual) of each reportable person, that is an account holder of the account;
b) in the case of any entity which is an account holder and which, after application of due diligence procedures prescribed under rules, is identified as having one or more controlling persons that is a reportable person,-
i) the name and address of the entity, taxpayer identification number assigned to the entity by the country or territory of its residence; and
ii) the name, address, date and place of birth of each such controlling person and taxpayer identification number assigned to such controlling person by the country or territory of his residence;
c) the account number (or functional equivalent in the absence of an account number);
d) the account balance or value (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) at the end of relevant calendar year or, if the account was closed during such year, immediately before closure;
e) prescribed information in the case of any custodial account or depository account;
f ) in the case of any account held by a nonparticipating financial institution (as defined under the rules), for calendar year 2015 and 2016, the name of each non-participating financial institution to which payments have been made and aggregate amount such payments.
6. The statement of reportable account is required to be furnished by a reporting financial institution in Form No. 61B for every calendar year by the 31st day of May following that year. The statement pertaining to calendar year 2014 shall be furnished by the 31st day of August, 2015.
The statement shall be furnished to the Director of Income-tax (Intelligence and Criminal Investigation) or the Joint Director of Income-tax (Intelligence and Criminal Investigation) through online transmission of electronic data to a server designated for this purpose under the digital signature.
7. Every reporting financial institution shall communicate to the Principal Director General of Income-tax (Systems) the name, designation and communication details of the Designated Director (person designated by reporting FI to ensure overall compliance) and the Principal Officer (an officer designated by the reporting FI) and obtain a registration number.
8. The due diligence procedure for the purposes of identifying reportable accounts among preexisting individual accounts has been prescribed thoroughly. Also, pre-existing individual account is not required to be reviewed, identified or reported, if the balance or value as on the 30th June, 2014, does not exceed an amount equivalent to $50,000. This limit is $250,000 in case of entities.
9. The procedure for purpose of identifying reportable accounts among new individual accounts and new entity accounts are also laid under the rules.
10. In case of a U.S. reportable account opened on or after the 1st July, 2014 but before the date of entry into force of FATCA agreement, notwithstanding the due diligence procedures specified in sub-rules for new accounts, the reporting financial institution may, in lieu of the procedures specified in the said sub-rules, apply the certain specified alternative procedures given under the Rules.
These Rules would facilitate the effective and efficient implementation of the intergovernmental agreement between India and US under the FATCA. They will remove domestic legal impediments to compliances by the Financial Institutions. Apart from this, the Government of India, on reciprocal basis, shall receive information about the Indian tax residents withholding the assets abroad. This will help to eradicate tax evasions and ensure the Government its share of revenue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.