Income-tax Rules, 1962 were amended vide Notification No. 62 of 2015 dated 7th August, 2015 by inserting Rules 114F to 114H and Form 61B to provide a legal basis for the Reporting Financial Institutions (RFIs) for maintaining and reporting information about the Reportable Accounts. These Rules have been developed in consultation with Regulators and Financial Institutions in order to address their concerns wherever possible. The due date for filing of Form 61B for the calendar year 2017 is 31 May 2018.

First, an entity needs to find out whether it is a Reporting Financial Institution. Then, Reporting Financial Institution needs to review their financial accounts by applying due diligence procedures to identify whether any of the financial account is a Reportable Account. If any account is identified as a reportable account, then the Reporting Financial Institution shall report the relevant information in Form 61B in respect of the identified reportable account.

Process of Reporting under FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard)

1. Identifying a Reporting Financial Institution (RFI)

2. Reviewing the Financial accounts of RFI

3. Identifying the Reportable Accounts by applying due diligence rules

4. Report the relevant information in respect of identified Reportable Accounts in Form 61B

1. Identifying a Reporting Financial Institution

RFI is defined in Rule 114F(7) to mean:-

(a) A 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.

Financial Institution will not include Non-reporting Financial Institutions even though they satisfy the above conditions.

Following Steps may be followed to determine whether a person is a RFI and thus has reporting obligations:

Step 1: Is it an Entity?

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

Step 2: Is the Entity a Financial Institution?

The definition of Financial Institution in the Rule 114F(3) classifies FIs in four different categories, namely

  • Custodial Institutions,
  • Depository Institutions,
  • Investment Entities and
  • Specified Insurance Companies.

A. Custodial Institutions

Custodial Institution is defined in Explanation (a) to Rule 114F(3) to mean any entity that holds, as a substantial portion of its business, financial assets for the account of others and where its income attributable to the holding of financial assets and related financial services equals or exceeds twenty percent of its gross income during the three financial years that end on 31 March prior to the year in which determination is made or the period during which the entity has been in existence, whichever period is less.

Entities such as central securities depositories (CSDL and NSDL), custodian banks, brokers, and depository participants, would generally be considered as custodial institutions.

B. Depository Institutions

Depository Institution is defined in Explanation (b) to Rule 114F(3) to mean any entity that accepts deposits in the ordinary course of a banking or similar business.

An Entity is considered to be engaged in a “banking or similar business” if, in the ordinary course of its business with customers, it regularly engages in activities such as:

(a)  Accepts deposits or other similar investments of funds;

(b)  Makes personal, mortgage, industrial, or other loans or provides other extensions of credit;

(c)  Purchases, sells, discounts, or negotiates accounts receivable, instalment obligations, notes, drafts, checks, bills of exchange, acceptances, or other evidences of indebtedness;

(d)  Issues letters of credit and negotiates drafts drawn thereunder;

(e)  Provides trust or fiduciary services;

(f)   Finances foreign exchange transactions; or

(g)  Enters into, purchases, or disposes of finance leases or leased assets.

Savings banks, commercial banks, savings and loan associations, credit unions, and Non-Banking Financial Companies (NBFCs) would generally be considered Depository Institutions.

C. Investment Entity

Explanation (c) to Rule 114F(3) defines two types of investment entities:

1. Entity’s primary business consists of one or more of the following activities for or on behalf of a customer, namely:-

  • trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading; or
  • individual and collective portfolio management; or
  • otherwise investing, administering, or managing financial assets or money on behalf of other persons; and

The gross income from such business activities has to be equal or more than 50% of the gross income over a three year period.

2. Entity’s primary income is from business of investing, reinvesting, or trading in financial assets and such entity managed by another entity that is a depository institution, a custodial institution, an investment entity or a specified insurance company and also the gross income of the entity from such business activities is more than 50% of the entities gross income over a three year period.

Exception

An investment entity established in India that is a financial institution, will be treated as Non-Reporting Financial Institution (See para 2.5), if it only

(a)  renders investment advice to, and acts on behalf of; or

(b)  manages portfolios for, and acts on behalf of; or

(c)  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.

D. Specified Insurance Company

Specified Insurance Company is defined in Explanation (d) to Rule 114F(3) to mean any entity that is an insurance company (or the holding company of an insurance company) that issues, or is obligated to make payments with respect to, a Cash Value Insurance Contract or an Annuity Contract.

A “cash value insurance contract” is defined in Explanation (f) of Rule 114F(1) and it means an insurance contract (other than an indemnity reinsurance contract between two insurance companies) that has a cash value. For US Reportable account, a threshold of USD 50,000 has been provided.

Similarly, annuity contract has been defined in Explanation (e) of Rule 114F(1).

A single premium life insurance contract which does not permit an amount to be paid on surrender or termination of the contract and which does not allow amounts to be borrowed under or with regard to the contract, shall not constitute a cash value insurance contract.

Insurance companies that only provide General Insurance or term Life Insurance should not be Financial Institutions and neither will reinsurance companies that only provide indemnity reinsurance contracts.

If a reporting entity qualifies for more than one category of financial institutions [eg. (i) Depository Institution (ii) Custodial Institution] then the reporting entity should get registered for all different categories and submit different form 61B for different type of financial institutions.

There may be a situation in which one FI maintains more than one type of accounts [for example both Depository as well as Custodial account], however, the FI may qualify as only one type of financial institution. In this case, FI shall register only as one type of financial institution but will report both types of accounts.

For example, there may be one financial institution X which qualifies only as Depository Institution and maintains both depository as well as custodial accounts. X will get registered only as Depository Institution but will report both types of accounts – depository as well as custodial accounts.

Step 3: Is the Financial Institution in India?

The Financial Institutions resident in India, their branches located in India and branches of Foreign Financial Institutions that are located in India are the Reporting Financial Institutions (RFIs) while Foreign Financial Institutions, their foreign branches and foreign branches of Indian Financial Institutions are not treated as RFI. In the case of Trusts, the reporting requirement is on the Trustees resident in India, unless the required information is being reported elsewhere because the trust is treated as resident there.

Step 4: Is the Financial Institution a Non-Reporting Financial Institution?

There are certain FIs which are not required to maintain or report the information. These FIs are called non-reporting financial institutions (NRFIs) and defined in Rule 114F(5).

The NRFI defined in the Rule are as under:

(a) A Governmental entity, International Organisation or Central Bank;

(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,

(d) A gratuity fund or a provident fund;

(e)  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);

(f)  A qualified credit card issuer;

(g)  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;

(h) an exempt collective investment vehicle;

(i) 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;

(j)  a financial institution with a local client base;

(k) a local bank;

(l)  a financial institution with only low-value accounts;

(m) sponsored investment entity and controlled foreign corporation, in case of any U.S. reportable account;

(n) sponsored closely held investment vehicle, in case of any U.S. reportable account.

2. Reviewing the Financial accounts of RFI

There are broadly five types of financial account. These accounts along with the institutions which maintain them are given below.

Accounts Financial Institution generally considered to maintain them
Depository Accounts The Financial Institution that is obligated to make payments with respect to the account (excluding an agent of a Financial Institution).
Custodial Accounts The Financial Institution that holds custody over the assets in the account.
Equity and debt interest in

certain Investment Entities

The equity or debt interest in a Financial Institution is maintained by that Financial Institution.
Cash Value Insurance Contracts The Financial Institution that is obligated to make payments with respect to the contract.
Annuity Contracts The Financial Institution that is obligated to make payments with respect to the contract.

3. Identifying the Reportable Accounts by applying due diligence rules

Once a RFI has identified the Financial Accounts maintained by them, they are required to review those accounts to identify whether any of them are Reportable Accounts. If any of the financial account is found to be reportable account, information in relation to those accounts must be reported in Form 61B.

In general terms, a Reportable Account means an account, which has been identified pursuant to the due diligence procedure, as held by

  1. A reportable person; or
  2. An entity, not based in United States of America, with one or more controlling persons that is a specified U.S. person; or
  3. A passive non-financial entity (passive NFE) with one or more controlling persons that is a person described in sub-clause (b) of clause (8) of the rule 114F.

Thus, an account can be a Reportable Account by virtue of the Account Holder or by virtue of the Account Holders’ Controlling Persons. These rules have been laid down in the Guidance note issued for such reporting under FATCA dated 31.12.2015.

Due Diligence Procedure

The RFIs need to identify the Reportable Accounts by carrying out due diligence procedures. There are different due diligence procedures for the accounts held by individuals and accounts held by entities. There is a further classification of accounts as ‘Preexisting accounts’ and ‘New Accounts’. The standardized approach to be applied for carrying out due diligence procedure ensures quality of information to be reported and exchanged. The rules also utilize the information available under the existing processes such as those for Anti Money Laundering purposes. This is particularly the case for Preexisting Accounts where it is more challenging and costly for Financial Institutions to obtain new information from the Account Holder.

4. Report the relevant information in respect of identified Reportable Accounts in Form 61B

After the RFI has identified the reportable accounts, RFI needs to report specific information in respect of each reportable account. As per Rule 114G(1), RFI needs to maintain and report the following information in case of each Reportable Account:-

1. The name, address, taxpayer identification number (assigned to the account holder by the country or territory of his residence for tax purposes) and date and place of birth (in the case of an individual) of each reportable person, that is an account holder of the account;

2. In the case of any entity which is an account holder and which, after application of due diligence procedures prescribed in rule 114H, is identified as having one or more controlling persons that is a reportable person,-

a. The name and address of the entity, taxpayer identification number assigned to the entity by the country or territory of its residence; and

b. 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;

3. The account number (or functional equivalent in the absence of an account number);

4. 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;

5. In the case of any custodial account,-

a. the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year; and

b. the total gross proceeds from the sale or redemption of financial assets paid or credited to the account during the calendar year with respect to which the reporting financial institution acted as a custodian, broker, nominee, or otherwise as an agent for the account holder;

6. In the case of any depository account

In the case of any depository account, the total gross amount of interest paid or credited to the account during the relevant calendar year;

7. In the case of any account other than custodial or depository accounts-

In the case of any account other than custodial or depository accounts, including accounts held by investment entities and cash value insurance contract and annuity, the total gross amount paid or credited to the account holder with respect to the account during the relevant calendar year with respect to which the reporting financial institution is the obligor or debtor, including the aggregate amount of any redemption payments made to the account holder during the relevant calendar year; and

8. In the case of any account held by a non-participating financial institution

In the case of any account held by a non-participating financial institution, for the calendar year 2015 and 2016, the name of each non-participating financial institution to which payments have been made and the aggregate amount of payments.

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Company: Wadhwa & Shah, Chartered accountants
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