Foreign Account Tax Compliance Act(FATCA)

Reporting Requirement under Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS)

1. India has signed the Inter-Governmental Agreement (IGA) with the USA on 09-07-2015, for improving International Tax Compliance and implementing the Foreign Account Tax Compliance Act (FATCA). India Has also signed a multilateral agreement on 03-06-2015 to automatically exchange information based on article 6 of the convention on mutual administrative assistance in tax matters under CRS, formally known as Automatic exchange of Financial Account information (AEoI).

2. Government of India has amended the Income tax rules dated 07-08-2015 and after rule 114E they added Rule 114F (Definitions), 114G (Information to be maintained and reported) and 114H (Due diligence requirement) for operationalization of IGA and CRS. Information in this regard have to be furnished in a form 61B.

3. All the prescribed financial institutions as defined under Income tax rule 114F shall complying with the reporting requirements. Financial institutions should register on income tax portal as reportable financial institutions by uploading the Form 61B or Nil Report.

4. Following are the Key points related to Reporting requirements are enumerated below:-

• Difference between FATCA and CRS as follows:-

S.no.	FATCA (Foreign Account tax Compliance Act)	CRS (Common Reporting Standards)
1.	The US Tax Department launched FATCA in 2010 to promote tax compliance and discourage tax evasion. It stands for Foreign Account Tax Compliance Act.	CRS is roughly a more international version of FATCA. While the FATCA is only for US persons and the CRS is applicable for citizens of every registered country.
2.	Needs the help of a financial institution to find US persons	CRS has 90 countries (except the US) committed to it – has a wider scope.
3.	It is not compulsory to report on financial accounts always	Reporting your financial accounts is mandatory under CRS.
4.	India has signed the Inter-Governmental Agreement (IGA) with the USA on July 9, 2015, for Improving International Tax Compliance and implementing the Foreign Account Tax Compliance Act (FATCA).	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), formally referred to as the Standard for Automatic Exchange of Financial Account Information (AEOI).

 

• Financial Account means an account (other than an excluded account) maintained by a financial institutions and includes

(i) Depository account-The Financial Institution that is obligated to make payments with respect to the account (excluding an agent of a Financial Institution).

(ii) Custodial Account-The Financial Institution that holds custody over the assets in the account.

(iii) Equity and debt interest in certain Investment Entities-The equity or debt interest in Financial Institution is maintained by that Financial Institution.

(iv) Cash Value Insurance Contracts-The Financial Institution that is obligated to make payments with respect to the contract.

(v) Annuity Contracts-The Financial Institution that is obligated to make payments with respect to the contract.

 

• Excluded Account

There are few categories of financial accounts which have low risk of being used to evade tax and thus have been excluded from the need to be reviewed or reported. These accounts are called “Excluded Accounts”. Details are as under:-

(i) Retirement or pension accounts satisfying certain conditions Explanation (h)(i) to Rule 114F(1).

(ii) Non-retirement tax-favored accounts subject to regulations and satisfying certain conditions Explanation (h)(ii) to Rule 114F(1).

(iii) Account established under the Senior Citizens Savings Scheme Rules Explanation (h)(iii) to Rule 114F(1).

(iv) Term Life Insurance contracts satisfying certain conditions Explanation (h)(iv) to Rule 114F(1).

(v) Accounts held by Estates Explanation (h)(v) to Rule 114F(1).

(vi) Escrow Accounts established in connection with court judgments etc. Explanation (h)(vi) to Rule 114F(1). (vii) Depository accounts (other than US reportable accounts) due to non-returned overpayments in case of credit card and other accounts and satisfying certain conditions Explanation (h)(vii) to Rule 114F(1).

 

• 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.

 

• REPORTING FINANCIAL INSTITUTIONS

(i) 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.

Steps to determine whether a person is RFI or not:-

1. First Step that it is Entity. Entity would include legal person and legal arrangements, such as corporations, partnerships, trusts, foundations and HUF. Individuals, including sole proprietorships, are therefore not RFIs.

2. Second step that Entity should be Financial Institutions.

3. Third Step that 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 case of Trust, reporting requirement on trustee resident in India.

4. Fourth Step that Financial Institution should not be Non-Reporting Financial Institutions

 

• Non-Reporting Financial Institutions

There are certain FIs which are not required to maintain or report the information. These FIs are called non-reporting financial institutions (NRFIs). The NFRI are as follows:-

(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, a gratuity fund or a provident fund.

(d) 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).

(e) A qualified credit card issuer.

(f) An investment entity established in India that is a financial institution only because it

1. renders investment advice to, and acts on behalf of; or
2. manages portfolios for, and acts on behalf of; or
3. 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.

(g) An exempt collective investment vehicle.

(h) 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.

(i) A financial institution with a local client base.

(j) A local bank.

(k) A financial institution with only low-value accounts.

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

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

 

• Non-Financial Entity (NFE)

An entity which is not a financial institution. There are two types of NFE- active and passive.

Active NFE has been defined in Explanation (A) to rule 114F (6) and includes regularly traded entities etc.

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.

 

• Financial Accounts which are Reportable Accounts

1. 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.

 

(A). 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.

(B). Reportable person has been defined in the Rule 114F(8) and means-

(a) one or more specified U.S. persons; or

(b) one or more persons other than:

 i. a corporation the stock of which is regularly traded on one or more established securities markets;

ii. any corporation that is a related entity of a corporation described in item (i);

iii. a Governmental entity; iv. an International organisation;

v. a Central bank; or

vi. a financial institution

that is a resident of any country or territory outside India (except United States of America) under the tax laws of such country or territory or an estate of a decedent that was a resident of any country or territory outside India (except United States of America) under the tax laws of such country or territory.

Thus, generally speaking, there are two types of reportable person. First one has been defined specifically for USA. Second one is for the other countries.  

 

(C). Reportable Accounts by virtue of the Account Holder’s Controlling Persons

(a). Regardless of whether the Financial Account is a Reportable Account by virtue of the Account Holder, a second test in relation to the Controlling Persons of certain Entity Account Holders needs to be applied to ascertain whether the Controlling Persons of such Entities are residents of countries/territories outside India. If this test is satisfied, the account would be Reportable Account.

(b). 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.

(c). In the case of other countries/territories, if the account is held by a Passive Non-Financial Entity (NFE) with one or more controlling persons resident in a country/territory outside India, then account will be reportable.

 

• DUE DILIGENCE PROCEDURE

1. 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 ‘Pre-existing accounts’ and ‘New Accounts’.

2. 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.

3. RFIs should record the date of identification of account as reportable account which may be used for audit/compliance purposes.

4. There are separate due diligence procedures for Preexisting and New Accounts. These accounts are differentiated on the basis of cut-off date. There are different cut-off dates for FATCA and CRS.

1. Pre-existing account means a financial account maintained by a RFI.

• In case of a U.S. reportable account, as on the 30 June, 2014; and
• In case of other reportable account, as on the 31 December 2015.

2. New account means a financial account maintained by a RFI opened on or after

• In case of a U.S. reportable account, the 1 July, 2014; and
• In case of other reportable account, the 1 January, 2016

5. The due diligence procedure is also dependent on balance/value of the financial account. On the basis of balance/value, accounts are also classified High value and Lower value accounts. Classification as per Following Table:-

Classification of Accounts	Status	Value	Due Diligence Threshold
Preexisting- US (as on 30.06.2014)	Individual	High Value Account	Account Balance or Value Exceeds $10,00,000
		Lower Value Account	Account balance or Value exceeds $50,000 but does not exceed $1,000,000
	Entity	NA	Account balance or value exceeds $250,000
New-US (opened after 30.06.2014)	Individual	NA	Account balance or value exceeds $ 50,000*
	Entity	NA	No threshold
Preexisting- Other (as on 31.12.2015)	Individual	High Value Account	Account Balance or Value Exceeds $10,00,000
		Lower Value Account	Account balance or Value does not exceed $1,000,000
	Entity	NA	Account balance or value exceeds $250,000
New-Other (opened after 31.12.2015)	Individual	NA	No threshold
	Entity	NA	No threshold

* only for depository account and cash value insurance contract.

 

6. High Value Accounts and Low Value Accounts

Classification	Category	Balance or value
US Reportable	High Value	Balance exceeding USD 10,00,000 as on 30-06-2014 or 31 December of any subsequent year
	Lower Value	Balance exceeding USD 50,000 but less than USD 10,00,000 as on 30-06-2014 or 31 December of any subsequent year
Other Reportable	High Value	USD 10,00,000 as on 31-12-2015 or 31 December of any subsequent year
	Lower Value	Balance less than USD 10,00,000 as on 31-12-2015 or 31 December of any subsequent year

 

7. Accounts not required to be reviewed or reported

There are certain preexisting individual accounts which are not required to be reviewed or reported. Rule 114H(3)(a) describes the criterion which is as follows:

• In case of US reportable accounts

(i) If the account balance or value as on 30 June, 2014 does not exceed USD 50,000;

(ii) If the account is a cash value insurance contract or annuity contract, and account balance or value as on 30 June, 2014does not exceed USD 250,000;

(iii) If the account is a cash value insurance contract or an annuity contract and the RFI, under any other law for the time being in force in India or of the USA, is prevented from selling such contract to a person who is a resident of the USA.

• In case of other reportable accounts

(i) If it is a cash value insurance contract or an annuity contract and RFI, under any other law for the time being in force in India, is prevented from selling such contract to a person who is not a tax resident of India.

 

All other accounts are required to be reviewed unless they are excluded accounts.

Thus it can be seen that while there is threshold account balance below which preexisting individual accounts are not required to be reviewed and reported under FATCA, there is no such threshold for CRS.

 

8. Self-certification

• In the case of new US reportable accounts self-certification shall be obtained on account opening or within 90 days form the end of calendar year in which account ceases to be covered non-reportable, to determine the account holder’s residence or residences for tax purposes.
• In case of new other reportable accounts, on account opening, the Reporting Financial Institution must obtain a self-certification from customer, as part of the account opening documentation, to determine the account holder’s residence or residences for tax purposes.
• The self-certification will specify where the individual is resident for tax purposes. If the self-certification establishes that the Account Holder is resident for tax purposes in a country/territory outside India, then, the Reporting Financial Institution must treat the account as a Reportable Account and the self-certification shall also include the account holder’s taxpayer identification number with respect to such country or territory outside India and date of birth
• The self-certification can be provided in any form but in order for it to be valid, it must be signed (or otherwise positively affirmed) by the Account Holder, be dated, and must include the Account Holder’s: name; residence address; jurisdiction(s) of residence for tax purposes; TIN(s) and date of birth.
• The Reporting Financial Institution must also confirm the reasonableness of such self-certification based on the information obtained by it in connection with the opening of the account, including any documentation collected in accordance with Prevention of Money Laundering (Maintenance of Records) Rules, 2005.
• Where a self-certification has been obtained for a new individual account and if there is a change of circumstances with respect to such account which causes the reporting financial institution to know, or have reason to know, that the said self-certification is incorrect or unreliable, the reporting financial institution shall not rely on the said self-certification and shall obtain a valid self-certification that establishes the residence or residences for tax purposes of the account holder. If the Reporting Financial Institution is unable to obtain a valid self-certification, the Reporting Financial Institution shall treat the account as a reportable account with respect to each such country or territory outside India for which indicia is identified.

9. In the case of USA, the accounts opened from 1 July, 2014 to the date of entry into force of the IGA between India and USA, i.e., 31 August, 2015, there is an alternate procedure for due diligence prescribed in Rule 114H(8).

 

*ONLY FOR KNOWLEDGE SHARING*