The FATCA will come into force from July 1, 2014, and requires foreign financial institutions (FFIs) such as banks, mutual funds, hedge funds, insurance companies, etc, to register with the Internal Revenue Services (IRS) of the US and furnish certain information regarding accounts held by US persons that are worth more than $50,000. The penalty for non-compliance by FFIs entails a withholding tax of 30% on their US-sourced income/receipts.
But what does this mean for Indian financial institutions (FIs)
India has consented to Model-1A IGA in terms of which the Indian FIs shall be able to report information on their US account holders through the Central Board of Direct Taxes (CBDT) instead of reporting directly to the IRS.
Indian FIs shall no longer be required to enter into an agreement with the IRS and will automatically attain deemed compliant status. However, Indian FIs will have to register online at the IRSs registration portal. The registration deadline for FIs having branches in countries which do not have an IGA with the US under Model-1 is June 3, so as to be on the list of IRS-compliant entities by July 1, 2014. FIs not having such branches can register before December 22, 2014, so as to be on the list of IRS-compliant entities by January 1, 2015.
The entering into the IGA by India is a welcome move for Indian FIs since the compliance will be much easier than it would have been in the absence of an IGA.
Compliance with the FATCA is proving to be a challenge for FFIs and the Indian experience is not expected to be different. In the Indian context, the following challenges are expected:
* Indian KYC norms may not contain the US status indicia (indications) which are the fundamental basis for determination of US status. The US status indicia for individuals and institutions are listed in the accompanying table. Satisfaction of any of this criteria is not in itself determinative of whether or not the account is owned by a US person, it only means that the Indian FI will need to scrutinise the account further to establish whether or not the account is owned by a US person.
* Indian FIs may need to change their internal processes to ensure that they have sufficient information in addition to the standard KYC norms, thereby ensuring that no violation takes place on account of insufficient information.
* Indian FIs shall have to review their entire customer base, new as well as existing, for the above indicia. The customers shall have to be classified according to the FATCA legislation.
* For any customer account that gets flagged with the US indicia, FIs shall have to confirm the FATCA status, and where necessary, contact the customer for further information and documentation.
* Identification will need to be an ongoing processa reviewing of status of existing account holders shall be required for any change in status.
* Collation of all relevant information and reporting to the CBDT accurately and in a time-bound manner.
* Other issues such as getting waivers from customers, communicating with the Board of Directors and understanding what to do with customers who refuse to provide information.
* Given the complexities and also the costs involved in complying with the FATCA, undertaking a strategic analysis of whether to remain invested in the US, and whether to maintain or withdraw contact with US clients.
Understanding the challenges in the implementation of the FATCA on a global basis, the IRS has recently announced that it would regard 2014 and 2015 as a transition period for the purposes of enforcement and administration of requirements under the FATCA. However, the IRS will continue to enforce the law and only grant penalty reprieve for those institutions that meet the good faith effort reporting criteria in compliance with the FATCA. While it is not clear as to what will constitute a good faith effort, it has been met with relief by FFIs.
The Indian FIs are currently awaiting guidance from regulators such as Sebi and RBI on due diligence and reporting requirements with respect to the FATCA in their respective domain. Guidance from these regulators will go a long way in alleviating the concerns of the Indian FIs.
Tax avoidance has been taken up very aggressively by all jurisdictions in the recent years. With more and more countries supporting the FATCA and similar other proposals, the OECD recently proposed a model for global automatic tax information exchange. Therefore, it appears more than likely that legislations like the FATCA will be enacted by other countries. The FATCA is only one of the first steps in redefining bank secrecy as we know it.
While the FFIs cannot be expected to ensure that their customers are tax compliant, the devil is in the detail. With the onerous responsibilities under the FATCA and more such legislation waiting in the wings, the FFIs face challenging times ahead.
(This article was coauthored by Rahul Jain of Nangia & Co)
The author is managing partner, Nangia & Co