Background In the first two of my articles that were
published in the BCA Journal (February 2015 and April 2015 issues), we
had looked at the broad approach under FATCA and some portions of the
(then) draft regulations which had been at that stage circulated by the
Government to a small group for comments. The purpose of this article is
to trace the developments since then and address specific matters.
Before
proceeding, I must state that the views expressed in the article are my
personal views. They are not intended to be in the nature of tax advice
to the reader. They cannot be used as a defence against penalties
either under FATCA or any other law. The intent is to make readers aware
of a possible view. In regard to specific situations, they should
obtain advice from US tax advisors.
In the field of FATCA, the
Government of India signed the Model 1 Inter-Governmental Agreement
(IGA) on 9th July, 2015. The Rules for reporting u/s. 285BA were
notified on 7th August, 2015 and the first reporting deadline in respect
of records for 2014 was set at 31st August, 2015. This deadline was
later extended to 10th September, 2015. The initial guidance was issued
on 31st August and it is expected that additional detailed guidance may
be available later in the year. Even before these developments took
place, India signed the Minutes of Multilateral Competent Authority
Agreement (MCAA) in Paris as part of India’s commitment to be an early
adopter of OECD’s Common Reporting Standards (CRS).
IGA and the Rules
The
IGA lays down certain broad principles of the inter- Governmental
cooperation. Under Article 10(1), the IGA enters into force on the day
when India notifies the US that it has completed its internal procedures
for entry into force of the IGA. As India notified the US accordingly,
the IGA has entered into force.
Rules 114F, 114G and 114H
governing the reporting and the new reporting form i.e. Form 61B have
been introduced in the Income-tax Rules 1962 with effect from August 7,
2015. The attempt here is to examine the IGA and the Rules together for
ease of comparison and understanding.
Reporting deadlines and information required
The Table below gives the FATCA and the CRS reporting deadlines and the information required to be reported.
Abbreviations:
TIN – Taxpayer Identification Number; DOB – Date of birth; POB – Place
of Birth; DOI – Date of Incorporation; POI – Place of Incorporation;
NPFI – Non-Participating Financial Institution
An NPFI is a
financial institution as defined in Article 1(r) of the IGA1 other than
an Indian financial institution (FI) or an FI of any other jurisdiction
with which the US has an IGA. Where an FI is treated as an NPFI in terms
of the IGA between that other jurisdiction and the US, such NPFI will
also be treated as an NPFI in India.
Who is to report
In
terms of Rule 114G(1), every reporting financial institution (FI) has
to do the relevant reporting. The term reporting FI is defined under
Rule 114F(7) to mean
– A financial institution which is resident
(the reference here is to tax residence status) in India but excluding a
branch outside India of an Indian FI
– A ny branch in India of an FI that is not (tax) resident in India
In both cases, a non-reporting FI (not to be confused with NPFI) will be excluded from the ambit of the term reporting FI.
An Indian bank’s branch in (say) London will not be treated as a reporting FI but a Singapore or a US bank’s branch in India will be treated as reporting FI under Rule 114F(7).
Rule
114F(3) defines a financial institution to mean a custodial
institution, a depository institution, an investment entity or a
specified insurance company. The Explanation to Rule 114F(3) explains
the meaning of the four terms used in the sub-rule.
Under Rule 114F(5), a ‘non-reporting financial institution’ means any FI that is, –
(a)
A Government entity, an international organisation or a central bank
except where the FI has depository, custodial, specified insurance as
part of its commercial activity;
(b) R etirement funds of the Government, international organisation, central bank at (a) above;
(c) A non-public fund of the armed forces, an employee state insurance fund, a gratuity fund or a provident fund;
(d)
A n entity which is Indian FI solely because of its direct equity or
debt interest in the (a) to (c) above; (e) A qualified credit card
issuer;
(f) A FI that renders investment advice, manages portfolios
for and acts on behalf or executes trades on behalf a customer for such
purposes in the name of the customer with a FI other than a
non-participating FI;
(g) A n exempt collective investment vehicle;
(h)
A trust set up under Indian law to the extent that the trustee is a
reporting FI and reports all information required to be reported in
respect of financial accounts under the trust;
(i) A n FI with a local client base;
(j) A local bank;
(k)
In case of any US reportable account, a controlled foreign corporation
or sponsored investment entity or sponsored closely held investment
vehicle.
Paras (I), (J) and (K) of the Explanation to Rule
114F(5) clarify that Employees State Insurance Fund set up under the ESI
Act 1948 or a gratuity fund set under the Payment of Gratuity Act 1972
or the provident fund set up under the PF Act 1925 or under the
Employees’ (PF and Miscellaneous Provisions) Act 1952 will be treated as
non-reporting FI.
Para (N) of the Explanation to Rule 114F(5)
defines an FI with a local client base as one that does not have a fixed
place of business outside India and which also does not solicit
customers or account holders outside India. It should not operate a
website that indicates its offer of services to US persons or to persons
resident outside India. The test of residency to be applied here is
that of tax residency. At least 98%, by value, of the financial accounts
maintained by the FI must be held by Indian tax residents. The local FI
must, however, set in place a system to do due diligence of financial
accounts in accordance with Rule 114H.
The term ‘local bank’ will
include a cooperative credit society, which is operated without profit
i.e. it does not operate with profit motive. In this case also offering
of account to US persons or to persons resident outside India, will be
treated as a bar to being characterised as a local bank. The assets of
the local bank should not exceed US$ 175 million (assume Rs. 1050
crores, although the USD-INR exchange rate may fluctuate) and the sum of
its assets and those of its related entities does not exceed US$ 500
million (assume Rs. 3,000 crores). Certain other conditions also apply.
What is a financial account
Rule
114F(1) defines a ‘financial account’ to mean an account (other than an
excluded account) maintained by an FI and includes (i) a depository
account; (ii) a custodial account (iii) in the case of an investment
entity, any equity or debt interest in the FI; (iv) any equity or debit
interest in an FI if such interest in the institution is set up to avoid
reporting in accordance with Rule 114G and for a US reportable account,
if the debt or equity interest is determined directly or indirectly
with reference to assets giving rise to US withholdable payments; and
(v) cash value insurance contract or an annuity contract (subject to
certain exceptions).
For this purpose, the Explanation to Rule 114F(1) clarifies that a ‘depository account’ includes any commercial, savings, time or thrift account or an account that is evidenced by certificate of deposit, thrift certificate, investment certificate, certificate of indebtedness or other similar instrument maintained by a FI in the ordinary course of banking or similar business. It also includes an account maintained by an insurance company pursuant to a guaranteed investment contract. In ordinary parlance, a ‘depository account’ relates to a normal bank account plus certificates of deposit (CDs), recurring deposits, etc. A ‘custodial account’ means an account, other than an insurance contract or an annuity contract, or the benefit of another person that holds one or more financial assets. In normal parlance, this would largely refer to demat accounts. The National Securities Depository Ltd. (NSDL) statement showing all of their investments listed at one place will give the readership an idea of what a ‘custodial account’ entails. These definitions are at slight variance with the commonly understood meaning of these terms in India.
Para (c) of the Explanation clarifies that the term ‘equity interest’ in an FI means,
(a) In the case of a partnership, share in the capital or share in the profits of the partnership; and
(b) In the case of a trust, any interest held by
– Any person treated as a settlor or beneficiary of all or any portion of the trust; and
– Any other natural person exercising effective control over the trust.
For this purpose, it is immaterial whether the beneficiary has the direct or the indirect right to receive under a mandatory distribution or a discretionary distribution from the trust.
An ‘insurance contract’ means a contract, other than an annuity contract, under which the issuer of the insurance contract agrees to pay an amount on the occurrence of a specified contingency involving mortality, morbidity, accident, liability or property. An insurance contract, therefore, includes both assurance contracts and insurance contracts. An ‘annuity contract’ means a contract under which the issuer of the contract agrees to make a periodic payment where such is either wholly or in part linked to the life expectancy of one or more individuals. A ‘cash value insurance contract’ means an insurance contract that has a cash value but does not include indemnity reinsurance contracts entered into between two insurance companies. In this context, the cash value of an insurance contract means
(a) Surrender value or the termination value of the contract without deducting any surrender or termination charges and before deduction of any outstanding loan against the policy; or
(b) The amount that the policy holder can borrow against the policy
whichever is less. The cash value will not include any amount payable on death of the life assured, refund of excess premiums, refund of premium (except in case of annuity contracts), payment on account of injury or sickness in the case of insurance (as opposed to life assurance) contracts Para (h) of the Explanation to Rule 114F(1) defines an ‘excluded account’ to mean
(i) a retirement or pension account where
- the account is subject to regulation as a personal retirement account;
- the account is tax favoured i.e. the contribution is either tax deductible or is excluded from taxable income of the account holder or is taxed at a lower rate or the investment income from such account is deferred or is taxed at a lower rate;
- information reporting is required to the income-tax authorities with respect to such account;
- withdrawals are conditional upon reaching a specified retirement age, disability, death or penalties are applicable for withdrawals before such events;
- the contributions to the account are limited to either US$ 50,000 per annum or to US$ One million through lifetime.
(ii) an account which satisfies the following requirements viz.
- the account is subject to regulations as a savings vehicle for purposes other than retirement or the account (other than a US reportable account) is subject to regulations as an investment vehicle for purposes other than for retirement and is regularly traded on an established securities market;
- the account is tax favoured i.e. the contribution is either tax deductible or is excluded from taxable income of the account holder or is taxed at a lower rate or the investment income from such account is deferred or is taxed at a lower rate;
- withdrawals are conditional upon specific criteria (educational or medical benefits) or penalties are applicable for withdrawals before such criteria are met;
- the contributions to the account are limited to either US$ 50,000 per annum or to US$ One million through lifetime.
(iii) An account under the Senior Citizens Savings Scheme 2004;
(iv) A life insurance contract that will end before the insured reaches the age of 90 years (subject to certain conditions to be satisfied);
(v) An account held by the estate of a deceased, if the documentation for the account includes a copy of the will of the deceased or a copy of the deceased’s death certificate;
(vi) An account established in connection with any of the following
- A court order or judgment;
- A sale, exchange or lease of real or personal property, if the account is for the extent of down payment, earnest money, deposit to secure the obligation under the transaction, etc.
- An FI’s obligation towards current or future taxes in respect of real property offered to secure any loan granted by the FI;
(vii) In the case of an account other than a US reportable account, the account exists solely because a customer overpays on a credit card or other revolving credit facility and the overpayment is not immediately returned to the customer. Up to December 31, 2015, there is a cap of US$ 50,000 applicable for such overpayment.
How to report
Under Rule 114G(9), the reporting FI must file the relevant Form 61B with the office of the Director of Income-tax (Intelligence and Criminal Investigation) electronically under a digital signature of the designated director. The reporting FI must register on the income-tax e-filing website through its own login giving certain information including a ‘designated director’ and a ‘principal officer’. Although not stated in the Rules, the latter will generally be the contact person for the Government of India for any queries and the former will be the escalation point. These two terms are used under the Prevention of Money Laundering Act (PMLA). Currently, the registration is possible without obtaining a General Intermediary Identification Number (GIIN).
The report in Form 61B is, however, required to be uploaded through the personal PAN login of the designated director on the e-filing website. This feature is likely to undergo a change for the next reporting cycle.
Next steps and developments to come
The FIs will need to set up systems to do extensive due diligence procedures for existing accounts in order to comply with Rule 114H and to develop systems to capture the reporting information. Under Rule 114G(11), the local regulators for the FIs viz. the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory Development Authority will have to issue instructions or guidelines to the FIs under their respective supervision. To avoid conflicting instructions, such instructions must be synchronised. At the Government’s end, the e-filing website must allow for filing of Form 61B through the reporting FIs login under the digital signature of a person who is not necessarily a person authorised to sign the tax return of the reporting FI. We will connect again on due diligence and on these other developments.
