The Foreign Account Tax Compliance Act (FATCA) is a new chapter in the US Internal Revenue Code. Chapter 4 was added by the Hiring Incentives to Restore Employment (HIRE) Act. It seeks to identify US taxpayers having accounts at foreign financial institutions (FFIs) and attempts to enforce reporting of those accounts through withholding.
Under the regulations, the key characteristics are that it requires FFIs to enter into compliance agreements with US Treasury and to identify and report US accounts annually. It requires non-financial foreign entities (NFFEs) to report substantial US controlling persons or US owners or certify no US control or ownership. It requires withholding agent to withhold 30% of payments made to FFIs that are not in compliance with FATCA requirements. And it requires FFIs to withhold pass-through payments to recalcitrant accounts.
India, April 11, 2014, has in substance agreed to sign the Model 1 IGA (inter-government agreement) with the US which is still awaited. The implications of signing the IGA are:
* The financial institutions in India should not require to enter into agreement with US IRS, though it will require to register with US IRS and obtain the GIIN;
* There should be no withholding of FATCA tax on payments made to Indian financial institutions;
* Indian financial institutions should not require to withhold tax from payments made to recalcitrant account-holders but report the same;
* It will be a reporting regime, whereby reporting will be made by Indian financial institutions to Indian government of accounts held by US persons, which will be shared with the US IRS.
Till date, the US has signed Model 1 IGA with 47 countries and has, in effect, Model 1 IGA with 51 countries including India.
The US has signed Model 2 IGA with 7 countries and has, in effect, Model 2 IGA with 7 countries.
The Indian government has amended the provisions of section 285BA of the Act (Annual Information Return) by the Finance (No 2) Act 2014, to provide for the obligation of reporting tax information by prescribed reporting financial institution of reportable accounts.
The US had provided extended time for registration till December 31, 2014, to the financial institutions in countries, which, in substance, had agreed to sign the Model 1 IGA (e.g. India). On December 1, 2014, the US announced that jurisdictions which are treated as having an IGA in place will retain their status of deemed complaint beyond December 31, 2014, as long as they demonstrate a firm resolution to sign the IGA as soon as possible. This status would be monitored by the US on a monthly basis.
In view of this announcement, Indian financial institutions assumed that the registration timeline was also extended beyond December 31, 2014, until the US clarified otherwise by way of FAQ on December 22, 2014. Post that, Indian financial institutions have registered by December 31, 2014, but are not seen on the list of FFIs displayed on the US IRS website which is as of December 23, 2014.
Amongst the BRIC nations, India and China have an IGA Model 1 in effect. Brazil signed an IGA with the US in September 2014 whereas Russia has not yet entered into an IGA nor agreed in substance. As of December 23, 2014, Brazil topped the list with the maximum number (3,594) of FFIs registered with the US IRS whereas India had the least number of FFIs (442). The registration list as on February 1 should reflect the registrations done by Indian financial institutions in the last week of December 2014.
Registrations were quick and smooth but entity determination of whether it is an FFI or NFFE, and its subsequent classification into a custodial institution or an investment entity and its exemption as certified deemed compliant FFI under FATCA, raised queries specifically in cases of holding companies, funds, NBFCs, etc.
It is observed from the FFI list that there was no uniformity in the way Indian financial institutions have registered. Some have registered all entities within the financial group, irrespective of whether the concerned group entity qualified as FFI or not. In the case of mutual funds, it is observed that in some cases the schemes of the mutual fund are registered separately instead of the mutual fund itself. While in others it is observed that the fund manager or the trustee of the fund are registered as sponsoring entity which is likely to necessitate registration of the sponsored funds by January 1, 2016, resulting in duplication of efforts.
The OECD has developed a framework for multilateral automatic exchange of tax information based on the Model 1 IGA under FATCA, which is known as the Common Reporting Standard (CRS).
India is an early adopter and agreed for the implementation of CRS by January 1, 2016. In fact, 51 countries signed the Multilateral Competent Authority Agreement (MCAA) during the Global Forum on October 29, 2014, to take joint action to address tax evasion. At the last minute, India did not sign the MCAA on the ground of reconsideration by the apex court on the “confidentiality” clauses under India’s tax treaties.
The Indian financial institutions are now anxious to understand the country’s approach towards signing of the US IGA and the OECD MCAA and the timeline for reporting. FATCA and CRS require Indian financial institutions to make changes to their systems, processes and documentation to capture information for identification of account-holders and for reporting to the Indian government. This is an uphill task involving manpower training, system changes, changes to new client on-boarding, remediation of pre-existing account-holders, classification of entity accounts as per FATCA taxonomy, etc, which have an attached cost.
Several countries have issued guidance for implementing FATCA. Guidance from the Indian government is awaited and so also a need for a reasonable timeline for reporting, once the IGA is signed.
By Bahroze Kamdin and Smita Parulekar
Bahroze Kamdin is partner and Smita Parulekar is senior manager, Deloitte Haskins & Sells LLP