1. OVERVIEW OF FATCA
In 2010, USA enacted a law known as “Foreign Account Tax Compliance Act” (FATCA) with the objective of tackling tax evasion through obtaining information in respect of offshore financial accounts maintained by USA residents and citizens. The provisions of FATCA essentially provide for 30% withholding tax on US source payments made to Foreign Financial Institutions unless they enter into an agreement with the Internal Revenue Service (US IRS) to provide information about accounts held with them by USA persons or entities (firms/companies/trusts) controlled by USA persons. Since domestic laws of sovereign countries (including India) may not permit sharing of client confidential information by FIs directly with USA, USA has entered into Inter- Governmental Agreement (IGA) with various countries. The IGA between India and USA was signed on 9th July, 2015. It provides that the Indian FIs will provide necessary information to the Indian tax authorities, which will then be transmitted to USA periodically. Under the IGA, USA will also provide substantial information about Indians having financial assets in USA.
2. How to determine eligibility?
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.
3. Reporting Financial Institutions
Following Steps may be followed to determine whether a person is a RFI and thus has reporting obligations:
- Step 1: Is it an Entity?
- Step 2: Is the Entity a Financial Institution?
- Step 3: Is the Financial Institution in India?
- Step 4: Is the Financial Institution a Non-Reporting Financial Institution?
3.1 Step 1: Is it an Entity?
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.
3.2 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
3.2.1 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 31st 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 Custodial Institutions.
3.2.2 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, installment 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 and credit unions would generally be considered Depository Institutions.
3.2.3 Investment Entity
Explanation (c) to Rule 114F(3) defines two types of investment entities:
A. Entity’s primary business consists of one or more of the following activities for or on behalf of a customer, namely:-
(a)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
(b)individual and collective portfolio management; or
(c) 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.
B. 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.
An investment entity established in India that is a financial institution, will be treated as Non-Reporting Financial Institution, if it only
(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.
3.2.4 Specified Insurance Companies.
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.
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.
3.3 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.
3.4 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).
4. Reportable Accounts
In general terms, a Reportable Account means an account, which has been identified pursuant to the due diligence procedure, as held by
(a) a reportable person; or
(b) an entity, not based in United States of America, with one or more controlling persons that is a specified U.S. person; or
(c) 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.
4.1 Reportable person
There are two types of reportable person defined in the Rule 114F(8). First one has been defined specifically for USA. Second one is for the other countries.
4.2 Reportable Accounts by virtue of the Account Holder’s Controlling Persons
In case of USA, first it needs to be identified whether account is held by an entity, which is not based in USA and if yes, whether one or more controlling person of entity is specified U.S. person. If both of conditions are satisfied, the account will be US Reportable Account.
4.3 Non-Financial Entity (NFE)
It is an entity which is not a financial institution. There are two types of NFE – active and passive. The financial institution is required to determine whether the passive NFE is controlled by one or more Reportable persons
4.3.1 Passive NFE is defined in Explanation (D) to Rule 114F(6) as
(i) any non-financial entity which is not an active non-financial entity; or
(ii) an investment entity described in sub-clause (B) of clause (c) of the Explanation to clause (3) of Rule 114F
(iii) not a withholding foreign partnership or withholding foreign trust
The definition of Active NFE includes entities that are publicly traded (or related to a publicly traded Entity), Governmental Entities, International Organisations, Central Banks, or a holding NFEs of nonfinancial groups and essentially excludes Entities that primarily receive passive income or primarily hold amounts of assets that produce passive income (such as dividends, interest, rents etc.).
If the Entity Account Holder is a Passive NFE then the Financial Institution must “look-through” the Entity to identify its Controlling Persons. If the Controlling Persons are Reportable Persons then information in relation to the Financial Account must be reported, including details of the Account Holder and each reportable Controlling Person.
4.3.2 Controlling Person
Controlling person means the natural person who exercises control over an entity and includes a beneficial owner as determined under sub-rule (3) of rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.
|Entity||Beneficial Owner is natural person(s) who whether acting alone or together, or through one or more juridical person|
|Company||a. has a controlling ownership interest (>25%) or |
b. who exercises control through right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements
|Partnership Firm||has ownership of/entitlement to more than fifteen per cent (15 %) of capital or profits of the partnership|
|Unincorporated Association or Body of Individuals||has ownership of or entitlement to more than fifteen per cent (15 %) of the property or capital or profits of such association or body of individuals|
Where no natural person is identified as above, the beneficial owner is the relevant natural person who holds the position of senior managing official.
Where the client or the owner of the controlling interest is a company listed on a stock exchange, or is a subsidiary of such a company, it is not necessary to identify and verify the identity of any shareholder or beneficial owner of such companies.
Thus, if the Controlling Persons of a Passive NFE having an account in a Reporting Financial Institution are persons resident of a country/territory outside India, the account becomes a Reportable Account for all such countries/territories outside India , for which the controlling persons are tax resident. The details of the controlling person(s) will also be reportable to the respective country (ies) or territory (ies) outside India.
5. Procedure for Furnishing the Report
As per Rule 114G(9), the statement in respect of each reportable account needs to be filed by the RFIs to the Director or Joint Director of Income-tax (Intelligence and Criminal Investigation)
a) Generation of ITDREIN: The reporting financial institution is required to get registered with the Income Tax Department by logging in to the e-filing website. A link to register reporting financial institution has been provided under “My Account>Manage ITDREIN”.
b) Submission of details of reporting entity: After generation of ITDREIN, the reporting financial institution will be required to submit details of the reporting entity on the screen.
c) Registration of designated director and principal officer: After submission of reporting entity details, the reporting financial institution will be required to submit the details of designated director and principal officer.
d) Submission of Form 61B: Every reporting financial institution is required to submit the Statement of Reportable Account in Form 61B or submit Nil statement.
e) Submission of Nil statement: In case nil statement is to be submitted, the option to submit Nil statement is required to be selected.
6. Requirement of obtaining GIIN
The RFIs having U.S. Reportable Accounts need to register with the US IRS and obtain Global Intermediary Identification Number by registering at http://www.irs.gov/Businesses/Corporations/FATCA-Foreign-Financial-Institution-Registration-Tool.
6.1 Registration Process Overview
Step 1: Create FATCA Account Online
Each registered user will receive a FATCA ID and will create its own access code to log into the FATCA account. Sponsored entities, sponsored subsidiary branches of a sponsoring entity, and branches of a financial institution will not have separate accounts, but will be assigned separate GIINs, if eligible.
A financial institution or a direct reporting NFFE can be one of the following FI types:
|Single||An FI or direct reporting NFFE that does not have any member FIs and is registering for PFFI or RDCFFI status for itself or one or more of its branches. May include USFI registering a foreign branch to be treated as a reporting FI under a Model 1 IGA or that intends to apply for status as a QI.|
|Lead||A USFI, FFI, or compliance FI that is authorized to carry out most aspects of its member FIs’ FATCA registrations and will initiate the FATCA registration process for each of its member FIs that is a PFFI, or RDCFFI. A lead FI is not required to act as a lead FI for all member FIs within an EAG. Thus, an EAG may include more than one lead FI that will carry out FATCA registration for a group of its member FIs. A lead FI will be provided the ability to manage the online account for its member FIs.|
|Member||An FFI or direct reporting NFFE that is registering as a member FI of an EAG that is not acting as a lead FI and that is registering as a PFFI, RDCFFI or direct reporting NFFE. For purposes of registration, a member FI may also include a USFI registering a foreign branch that is treated as a reporting FI under a Model 1 IGA or that intends to apply for status as a QI. A member FI will need to obtain its FATCA ID from its lead FI. The FATCA ID is used to identify the member FI for purposes of registration and is not the same number as the GIIN|
|Sponsoring Entity||An entity that will perform the due diligence, withholding, and reporting obligations of one or more sponsored FFIs or the due diligence and reporting obligations of one or more sponsored direct reporting NFFEs. NOTE: A trustee of a trustee-documented trust should register by selecting sponsoring entity, if it’s registering to obtain a GIIN to use when fulfilling its obligations as a trustee of a trustee-documented trust.|
Step 2: Complete and Submit Registration
FATCA online registration contains four parts and 13 questions. Although the Online Registration system navigation bar displays “Part 3”, Part 3 is no longer a part of the system.
|Registration Part||To be completed by|
|Part 1 – My Information||All users|
|Part 2 – Expanded Affiliated Group Information||Lead FIs|
|Part 3 – QIs, WPs, or WTs Renewal||Part 3 is no longer part of the FATCA Online Registration system. QI/WP/WTs will renew their agreements in the QI/WP/WT system.|
|Part 4 – Submit||All users|
Steps 3 and 4: Wait for Registration to be Processed and Receive Approval
Once the registration is submitted and the system completes processing the registration, the responsible officer (RO) will be notified. If the registration is approved, a GIIN will be issued and can be viewed on the home page. FI branches will also be issued a branch GIIN, if applicable.
6.2 Information You Need to Register
FIs and direct reporting NFFEs need several key pieces of information to complete the online registration process. The registration checklist below outlines the information needed to complete the online FATCA registration.
|All FIs and Direct Reporting NFFEs||FI Type (single FI, lead FI, member FI, or sponsoring entity)|
|FI’s or direct reporting NFFE’s legal name|
|FI’s or direct reporting NFFE’s jurisdiction of residence for tax purposes|
|FI’s direct reporting NFFE’s jurisdiction tax ID (optional)|
|FI’s classification, i.e., participating FI not covered by an Intergovernmental Agreement (IGA) or a reporting financial institution under a Model 2 IGA; registered deemed- compliant financial institution (including a reporting financial institution under a Model 1 IGA); or None of the above|
|FI’s or direct reporting NFFE’s mailing address|
|Whether the FI maintains a branch in a jurisdiction outside of its jurisdiction of tax residence, and then whether the FI is a tax resident of the United States or maintains a U.S. branch (other than the U.S. territories)|
|If the FI is a tax resident of the United States or maintains a branch in the United States (other than the U.S. territories), the EIN of the FI or branch|
|Each jurisdiction in which the FI maintains a branch.|
|Business title for the FATCA responsible officer (RO) for the FI or direct reporting NFFE, along with legal name and contact information|
|Whether the RO or authorizing individual will designate one or more points of contact (POC) and, if so, the POCs’ contact information. A POC will be authorized to receive FATCA registration information and other related FATCA correspondence from the IRS. NOTE: Up to five POCs are allowed|
|Lead FI Only||In addition to the information required above for All FIs and Direct Reporting NFFEs:|
|Member FIs’ legal names, countries/jurisdictions of residence for tax purposes, and member FI Types. Once the lead FI has established the member’s account, the member FI or its lead FI will be required to complete the member FI’s registration. NOTE: The RO for a lead FI automatically becomes a POC for each of the lead FI’s member FIs|
|If the lead FI is the common parent entity of the expanded affiliated group|
|If the lead FI is not the common parent entity, the legal name of the common parent entity and optionally, the FATCA ID of common parent entity|