Chetan Chandak

Chetan ChandakWhat is FATCA?

FATCA stands for the Foreign Account Tax Compliance Act. It is a United States legislation which was primarily enacted to prevent tax evasion by US taxpayers using non-US financial institutions and offshore investment instruments.

FATCA requires Financial Institutions to report the relevant account information to the US Internal Revenue Services (the “IRS”), of all accounts held directly or indirectly by US Persons. In order to ascertain whether the customer is a US or non-US person, FATCA requires Financial Institutions to collect additional information or documentation from customers. If the customers fail to provide the requested information or documentation, Financial Institutions are required to withhold 30% US tax on certain types of US source income paid to such customers, with the potential to extend to non-US source income in future.

Why is it important and necessary for Foreign Financial Institutions to comply with US FATCA?

FATCA imposes a 30 percent withholding tax on any “withholdable (US source) payment” made to a Foreign Financial Institution. In case if FFI has to avoid this withholding tax, it must comply with the new customer identification, reporting, tax withholding requirements. At H&R Block we have advisors whe will guide you in FATCA compliance requirements by studying your case.

How FATCA is applicable to Indians (non-US person)?

As per FATCA provisions, financial institutions in India are required to report certain tax related information about US persons to the US Internal Revenue Service (IRS). Since the domestic laws of sovereign countries (including India) may not permit sharing of client’s confidential information by FIs directly with the USA, the USA has entered into Inter-Governmental Agreement (IGA) with various countries. The IGA between India and the USA for Automated Exchange of Information (AEOI) between the two countries was signed on July 9, 2015. It provides that the Indian FIs will provide necessary information to the Indian tax authorities, which will then be transmitted to the USA periodically. Under the IGA, the USA will also provide substantial information about Indians having financial assets in the USA. So, that’s how the Indian tax department will get the tax-related information of the Indians, which it can use for tapping the tax evasion cases.

Fatca Compliance

Whether the tax information is being shared with any other country as well?

India has also signed a multilateral agreement on June 3, 2015, to automatically exchange information based on Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters under the Common Reporting Standard (CRS). Currently, 116 jurisdictions participate in the Convention, which includes 15 jurisdictions covered by the territorial extension. The amended Convention provides for all possible forms of administrative co-operation between the participating countries in the assessment and collection of taxes, in particular with a view to combat tax avoidance and evasion. This co-operation ranges from the exchange of information, including automatic exchanges, to the recovery of foreign tax claims. As per this convention, 56 jurisdictions are committed to implementing AEOI in accordance with CRS by the end of 2017 and the balance 39 from 2018. 75 jurisdictions have also joined the Multilateral Competent Authority Agreement (MCAA) for exchanging information as per the above timelines.

What you mean by “Reportable Account” and “Indian Reportable Account”?

The term “Reportable Account” means a US Reportable Account or an Indian Reportable Account, as the context requires.

The term “Indian Reportable Account” means a Financial Account maintained by a Reporting US Financial Institution if:

(i) it is a Depository Account which is held by an individual resident in India, and receives more than $10 as interest in any given calendar year; or

(ii) in the case of a Financial Account other than a Depository Account, the Account Holder, including an Entity, is a resident of India that certifies that it is resident in India for tax purposes, with respect to which U.S. source income that is subject to reporting under chapter 3 of subtitle A or chapter 61 of subtitle F of the U.S. Internal Revenue Code is paid or credited.

Which are Reporting Financial Institutions (Entities) under FATCA or CRS?

Only Entities can be Reporting Financial Institutions or RFIs. The term “Entity” includes legal persons and legal arrangements, such as corporations, partnerships, trusts, foundations and HUF. Individuals, including sole proprietorships, are therefore not RFIs.

Therefore, entities (other than NRFI or Non-Reporting Financial Institution*) carrying on below listed activities are treated as Reporting Financial Institution:

  • DI – Depository Institution
  • CI- Custodial Institution
  • IE- Investment Entity
  • IC – Specified Insurance Company

In case if a Reporting Entity is engaged in more than one category of activities, it needs to submit different statements for different category of activities.  For example, if a reporting entity is maintaining certain accounts as a depository institution and certain other accounts as a custodial institution, it needs to submit two different statements.

* There are certain FIs which are not required to maintain or report the information.  These FIs are called non-reporting financial institutions (NRFIs) and are defined in respective agreements (FATCA or MCAA).

Which types of financial accounts need to be reported by the RFIs?

Generally, the RFIs will have to report the details of below listed financial accounts:

  • Savings Account
  • Checking Account
  • Current Account
  • Cash Credit/Overdraft Account
  • Credit Card Account
  • Prepaid Card Account
  • Loan Account
  • Term Deposit Account
  • Term Insurance Policy
  • Endowment Policy
  • Annuity Policy (Excluding ULIP)
  • ULIP Policy
  • Money Back Policy
  • Whole Life Policy
  • Trading Account
  • Mutual Fund Folio
  • Beneficiary Client Account
  • Beneficiary House Account
  • Clearing Member Pool Account
  • Others

Which financial information is reported for reportable financial accounts by RFIs?

  • Account balance or value at the end of reporting period: The account balance or value of the reported financial account as on the last day of the reporting period. In case if the account was closed during the reporting period then the balance immediately before closure. (Mandatory for all account types) the cash value insurance or annuity contract is the balance or value of the account. For Debt or equity accounts, the account balance is the value of the debt or equity interest that the account holder has in the financial institution.
  • Aggregate gross interest paid or credited: The aggregate gross amount of interest paid or credited to the account during the period. This information is  mandatory  for  depository  account  and  custodial
  • Aggregate gross dividend paid or credited: The aggregate gross amount of dividend paid or credited to the account during the period. This information can be collected from other regulated entity. This information is mandatory for custodial account.
  • Gross proceeds from sale of property: The gross proceeds from sale or redemption of property paid or credited to the account during the period with respect to which the reporting entity acted as a custodian, broker, nominee, or otherwise as an agent for the account holder. This information is mandatory for custodial account.
  • Aggregate gross amount of all other income paid or credited to the account: The aggregate gross amount of all other income paid or credited to the account during the period. This information is mandatory for custodial account.
  • Aggregate gross amount credited or debited to the account: Aggregate gross amount credited or debited to the account during the period.

For how many past years information needs to be reported?

Under FATCA agreement reporting, the US Financial Institution is under an obligation to share with respect to each Indian Reportable Account, all the information listed below starting 2014 and for all subsequent years

(1) the name, address, and Indian TIN of any person that is a resident of India and is an Account Holder of the account;

(2) the account number (or the functional equivalent in the absence of an account number);

(3) the name and identifying number of the Reporting U.S. Financial Institution;

(4) the gross amount of interest paid on a Depository Account;

(5) the gross amount of US source dividends paid or credited to the account; and

(6) the gross amount of other US source income  paid  or credited to the account, to the extent subject to reporting under chapter 3 of subtitle A or chapter 61 of subtitle F of the US Internal Revenue Code.

What is FATCA Notice?

As stated in above paras Indian tax authorities have started AEOI either under FATCA or Multilateral

Competent Authority Agreement (MCAA) with the different tax jurisdictions. Based on the information received from these jurisdiction of Indian taxpayers about their financial transactions abroad, tax department has started investigating possible tax evasion cases. Department is sending the communications u/s 133(6) of the IT Act to these taxpayers asking them to provide information on;

1. Details of their residential status for the related year

2. Details of the tax return filed for last three years

3. Clarification on reporting or non-reporting of such foreign income or assets in the tax returns filed (if any).

4. Reason if the amount is claimed as tax exempt in India

When or why you may receive it?

It is expected that under FATCA agreement US will have full will move towards full reciprocity towards India. Considering this if you had any pre-existing Reportable Indian Account maintained with any US Reporting Financial Institution as on 1st June 2014 or opened any New Reportable Indian Account on or after 1st July 2014 then the Indian tax department may get the information about the same. If the tax department receive information about your account in US, tax department may send you the notice as stated above.   

What this FATCA notice means for you and what should you do on receipt of such notice?

Receiving the FATCA notice may not necessarily mean that you have to pay huge tax or penalties to the Indian tax department. Whether any tax liability can arise out of such notice depends on many factors and need to be analysed carefully.

Once you receive this, it is important that you do not ignore or take it lightly. You need to read the notice carefully and check whether the notice is actually addressed to you. As a next step, you should identify the type of financial transaction mentioned in the notice and whether those are actually related to you. In case if the transaction are related to you then you also need to analyse whether you have any reporting obligation under Indian tax laws and you have reported it correctly in your tax return (both the income and the value of the asset in foreign asset schedule) for the respective year. You also need to analyse the whether you are eligible for any relief under the respective tax treaty while considering the tax impact of your international transactions.

Just in case if you have not done the reporting correctly or do not understand the tax implication, you should talk to your tax advisor or CA before responding to the notice.

What could be consequences for you if you do not respond to this notice?

Section 133(6) notice is issued to a taxpayer asking him certain details of transaction done during the year under consideration. Failure to comply with notice can result in penalty of Rs 10,000 u/s 272A.

Further, if the tax department has reasons to believe that certain income has escaped the assessment (based on the information received under FATCA agreement), it can assess or reassess your income u/s 147 by issuing you a notice u/s 148. Though the time limit for issuance of notice u/s 148 is 4-6 years in case of asset located outside India, it can be extended to 16 years.

What are the possible penalties for Non-reporting of Foreign Income or Assets Correctly under Indian Tax Laws?

Under the Black Money Act, undisclosed foreign income and assets are to be taxed at a flat rate of 30%. Beyond this, you may be have to pay significant penalties (up to 300% of the tax) with the risk of criminal prosecution.

Also, any failure to furnish the information or furnishing of inaccurate information in the return in relation to foreign income and/or foreign assets may also trigger a penalty of Rs 10 lakh.

Considering the high altitude of penal consequences for non-reporting or incorrect reporting, it is recommended to correctly report all foreign income and assets in the India tax return.

Author is Tax Research head with H&R Block India and is an expert in Direct Taxes, Expat Taxes, Taxation for HNI, Tax Research, Dual Taxation, Tax Litigation and in US Taxes.

For any FATCA compliance and notice related queries contact us at: Email ID: expats@hrblock.in or on Phone No: 020-61656622

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