Automatic Exchange of Information

The Foreign Account Tax Compliance Act (FATCA) was enacted by the Government of the United States in 2010, to combat offshore tax evasion and for detecting tax noncompliance by US individuals and US owned entities having foreign financial accounts and offshore assets. On July 9, 2015, India signed an Inter-Governmental Agreement (IGA) with the US to implement FATCA and improve tax compliance. This IGA obliges qualifying financial institutions (QFIs) in India to report about the financial accounts held by US persons in India to the Indian competent authority who in turn shall share the information with the US IRS. The agreement is reciprocal in nature i.e. US IRS is also obliged to provide India with information regarding accounts/assets held by Indian persons in the US.

On the other hand, OECD along with G-20 countries, on similar lines as FATCA, has developed a Standard for automatic exchange of Financial Account Information, Common Reporting Standard (CRS).

An attempt is made in this article to highlight the need, manner and impact of exchange of information under various types of agreements/frameworks.
1. Introduction

1.1 Article on Exchange of Information under a Tax Treaty

Exchange of Information between two jurisdictions can be made in several ways. Article 26 of the United Nations Model Convention (UNMC) and the OECD MC deal with provisions relating to the Exchange of Information (EOI). Almost all comprehensive tax treaties signed by India contain Article on Exchange of Information whereby Tax Authorities in India can obtain information about specific query from its counterpart in the other contracting State.

1.2 Tax Information Exchange Agreement (TI EA)

Countries (especially Tax Havens) with which India does not have a full-fledged tax treaty, an agreement to share information known as “Tax Information Exchange Agreement” (TIEA) has been entered into by India with 15 countries including Saint Kitts and Nevis, Bahamas, Bermuda, Liechtenstein, Gibraltar, British Virgin Islands, Isle of Man, Cayman Islands, Jersey, Macau, Liberia, Argentina, Guernsey and Monaco, San Marino.

The nature and type of information that can be requested under the TIEA include identity and ownership information, accounting information and banking information among other things.

Under a TIEA, the Contracting States are not required to provide administrative assistance and exchange information in cases of “fishing expedition”, i.e. speculative requests that have no apparent nexus to the inquiry or investigation in the requesting State. Thus, the information about all Indians having bank accounts in a particular country cannot be requested as it would amount to a fishing expedition.

1.3 Limitations of EOI under a Treaty and TIEA

Exchange of Information, both under a Tax Treaty or a TIEA has a major limitation and i.e. these instruments cannot be used for fishing expedition. In other words, information in respect of a specific person or case/ matter can only be obtained under these agreements. Therefore, perhaps a need was felt by India for more comprehensive and a broad framework whereby information flows continuously on an automated basis and that too in respect of all overseas transactions by residents/tax payers in India to unearth illicit deals or black money stashed abroad. In the above background, automatic exchange of information under FAT CA and Multilateral Agreement under the framework of CRS by OECD would prove to be crucial sources of information to Indian Revenue Authorities.

Let us deal with both these frameworks in some more detail.

2.0 Foreign Account Tax Compliance Act (FATCA)

2.1 Manner of Reporting under FATCA

The FATCA guidelines specify two types of Inter Governmental Agreements (IGA) that countries are expected to enter into with the US – Model 1 and Model 2. Under the Model 1 IGA, all foreign financial institutions (FFI) in the participant country (for instance, an insurance company or a bank operating in India) would be obliged to report all FAT CA related information to its specified competent authority (which, in India is the Central Board of Direct Taxes), who would then report this information to the US authorities. Under the Model 2 IGA, all foreign financial institutions are required to report information directly to IRS.

In each of such models, the foreign financial institutions will need to get itself registered with the IRS. However, in case of Model 2 IGA, these financial institutions will also need to sign an FFI agreement with the IRS. Switzerland is one such country that has adopted Model 2 IGA. India has executed the Model 1 IGA. As a result, qualifying Indian institutions need not sign an FFI agreement, but will have to register on the FAT CA Registration Portal or file Form 8957 of the IRS and obtain a Global Intermediary Identification Number.

Basic framework of IGA signed by India

(For further information on FATCA, you may refer to an article by CA. Sunil Kothare published in March 2015 issue of BCAJ) 2.2 I nformation reporting and disclosure under the IGA by Qualifying Financial Institutions (QFIs) in India As per the IGA, all financial accounts with QFIs in India such as banks accounts, investment in mutual funds or hedge funds, insurance policies etc. come under the purview of reporting under FAT CA. However, there are certain accounts which are not required to be reported by the QFIs to the Indian Competent Authority and in turn to the US IRS under FAT CA. They are as follows: ? List of Accounts exempt from reporting under FATCA A. C ertain Savings Accounts i. N on-Retirement Savings Accounts established in India under the Senior Citizens Saving Scheme of 2004 to provide Indian senior citizens savings and deposit accounts. ii. Retirement and Pension Account maintained in India that satisfies the following conditions: – T he account is subject to regulation as a personal retirement account or is part of a registered or regulated retirement or pension plan for the provision of retirement or pension benefits (including disability or death benefits); or is subject to regulation as a savings vehicle for purposes other than for retirement as the case may be;
– The account is tax-favored (i.e. contributions to the account that would otherwise be subject to tax under the laws of India are deductible or excluded from the gross income of the account holder or taxed at a reduced rate, or taxation of investment income from the account is deferred or taxed at a reduced rate);
– Annual information reporting is required to the tax authorities in India with respect to the account;
– Withdrawals are permitted only on reaching a specified retirement age, disability, or death, or on specific criteria related to the purpose of the savings account or penalties apply to withdrawals made before such specified events; and
– Either Annual contributions are limited to $50,000 or less or there is a maximum lifetime contribution limit to the account of $1,000,000 or less.

iii. Non-Retirement Savings Account that is maintained in India (other than an insurance or Annuity Contract) and satisfies following conditions:

– The account is subject to regulation as a savings vehicle for purposes other than for retirement;
–    The account is tax-favored (i.e., contributions to the account that would otherwise be subject to tax under the laws of India are deductible or excluded from the gross income of the account holder or taxed at a reduced rate, or taxation of investment income from the account is deferred or taxed at a reduced rate);

–    Withdrawals are permitted on meeting specific criteria related to the purpose of the savings account (for example, the provision of educational or medical benefits), or penalties apply to withdrawals made before such criteria are met; and

–    Annual contributions are limited to $50,000 or less and subject to certain rules laid down.

B.    Term Life Insurance Contracts satisfying the following conditions:

–    Maintained in India with a coverage period that will end before the insured individual attains age 90;
–    On which periodic premiums are paid which do not decrease over time and are payable at least annually during the period the contract is in existence or until the insured attains age 90, whichever is shorter;
 

–    The contract has no contract value that any person can access (by withdrawal, loan, or otherwise) without terminating the contract and is not held by a transferee for value.

C.    Account maintained in India, and is held solely by an estate if the documentation for such account includes a copy of the deceased’s will or death certificate.

D.    Escrow Accounts maintained in India established in connection with any of the following:

–    A court order or judgment;

–    For a sale, exchange, or lease of real or personal property subject to fulfillment of certain conditions;
–    An obligation of a Financial Institution servicing a loan secured by real property to set aside a portion of a payment solely to facilitate the payment of taxes or insurance related to the real property at a later time;

–    An obligation of a Financial Institution solely to facilitate the payment of taxes at a later time.

E.    Partner Jurisdiction Accounts

It refers to an account maintained in India and which is excluded from the definition of Financial Account under an agreement between the United States and another Partner Jurisdiction1 to facilitate the implementation of FATCA. However, such account should be subject to the same requirements and oversight under the laws of such other Partner Jurisdiction as if such account were established in that Partner Jurisdiction and maintained by a Partner Jurisdiction Financial Institution in that Partner Jurisdiction.

2.3 Due Diligence thresholds in case of new and pre existing accounts

FATCA requires full compliance by QFIs in India for “new accounts” (i.e. accounts opened after 30th June, 2014) as well as “pre-existing accounts” (i.e. accounts existing as on 30th June, 2014). This involves review, identification and reporting of relevant financial accounts. However, certain exemption thresholds are laid down by virtue of which no review or reporting of such accounts is required.

2.4    Impact of the IGA signed by India

2.4.1 Impact on US Citizens and Green card Holders living in India

Starting calendar year 2011, FATCA has subjected all US persons to report on Form 8938 their Bank, investment and brokerage accounts as well as other specified financial assets including but not limited to cash value of life insurance contracts and accumulation in certain retirement plans. Reporting of global income on US income tax return, including income earned in India, has undoubtedly been an important legal obligation of all US persons living in India. This is in addition to the long-standing requirement for US persons in India to report their bank accounts on Form TD 90.22-1 i.e. “Report of Foreign Bank and Financial Accounts (FBAR)”.

(For further information on FBAR, the reader may refer to Q.14 of our Article published in this column in April 2015 issue of BCAJ)

FATCA will have a direct impact on the US Citizens and green card holders who qualify to be US persons. Such persons may be holding accounts with QFIs in India which shall now be reported to the Indian Competent Authority and in turn to the US IRS. It may happen that they have not reported/ disclosed such accounts to the IRS and as a consequence of such reporting, they are exposed to heavy financial penalties and even criminal prosecution under the US tax laws. Such individuals may however opt to disclose the said accounts under the 2014 Offshore Voluntary Disclosure Program (OVDP) to avoid prosecution and limit their exposure to civil penalties.

2.4.2 Impact on Indian residents

With the Black Money Law now in force, the IGA signed by Government of India can further have adverse implications for the Indian resident taxpayers who are holding undisclosed assets in the US. The reciprocal nature of the IGA will oblige US to provide India with information regarding accounts/assets held by Indian persons in the US and which may happen to be undisclosed to the authorities in India.

Such information will provide more teeth not only to the Indian tax authorities but also to the RBI for detecting assets held by Indian residents/ taxpayers in the US.

2.4.3 Impact on Financial Institutions in India

The Inter-Governmental Agreement between India and US is based on Model-1 of FATCA guideline. Hence, the QFIs in India need not report directly to the IRS.

The IGA would result into following implications for FIs in India:

•     QFIs in India need to upgrade and expand their existing ‘Know Your Customer’ (KYC) procedures to identify US persons and impose additional reporting requirements on them;

•    Banks and other financial bodies may also need to get waivers from account holders to report information collected from them to the Indian competent authority;

•   Section 285BA of the Income-tax Act 1961 has been amended so as to serve as a broad enabling provision for reporting by QFIs in India for the purposes of tax information regimes such as FATCA. However, due to confidentiality clauses under different laws in India, appropriate regulations may need to be introduced which will enable and empower qualifying Indian institutions to comply with FATCA requirements and to mandate the US account holders to provide the requisite information.

•   Both 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.

•     Non-compliant FIs would be liable to a penal withholding tax of 30 per cent of their US sourced income.

3.0    Multilateral Automatic Exchange Of Financial Account Information

The Organization of Economic Development (OECD) along with G-20 countries, on similar lines as FATCA model 1 IGA, has developed a framework for multilateral automatic exchange of financial account information, known as Common Reporting Standard (CRS). CRS sets out a standard basis for automatic financial account information exchange between member countries.

As of 4th June 2015, 61 countries are signatories to the Multilateral Competent Authority Agreement (MCAA) committed to reciprocal tax information exchange. India is an early adopter and agreed for the implementation of CRS by January 1, 2016. India signed the MCAA AEOI CRS on 3rd June 2015. Compliance with CRS becomes mandatory from 1st January 2016.

More than 50 countries of the world have committed to exchange tax information on an automatic basis with effect from 2017 which includes notable tax havens and many developed nations as well. Some of the notable jurisdictions include Barbados, British Virgin Islands, Cayman Islands, Cyprus, Gibraltar, Guernsey, Isle of Man, Jersey, Liechtenstein, Luxembourg, Malta, Bahamas, UAE, Andorra, Bahrain, Panama, Cook Islands, Mauritius, UK, France, Germany and host of other countries including India.

4.0    Summation

Automatic Exchange of Information between US and India would hopefully start flowing from 1st October 2015 under FATCA. Information from more than 50 countries including notable tax haven would start flowing to India from 1st January 2016. Under the scenario, Indian tax officials will be better equipped to tackle the menace of Black Money and illicit/unreported transactions. Unprecedented powers are given to the Tax Administration under the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act, 2015. There is a fear amongst citizens about misuse of powers without corresponding accountability on the part of the tax officials. It is high time that Government bring about Tax Administration Reforms as per the recommendations by the Parthasarthi Shome Committee’s Report.