FATCA reporting In a country which has
entered into an Inter-Governmental Agreement (IGA) Model 1 agreement,
the Foreign Financial Institutions (FFIs) are not required to report
financial information directly to the US IRS. Instead, the FFIs have to
report such financial information to the Government of the country where
they are operating. This addresses a major hurdle in FAT CA
implementation viz., the issue of data privacy. Once the laws of an IGA
Model 1 country provide for the FFIs to provide data to the Government
of the country in which they are operating, it is difficult for the FFI
or the clients of the FFI to challenge such requirements under data
privacy laws operating in most countries.
In India, the term FFI,
would generally include banks, nonbank finance companies, housing
finance companies, depository participants (custodians), insurance
companies and similar institutions. In order to make FAT CA reporting
possible in the IGA Model 1 framework, the Government of India needed to
have a policy decision that India would participate in the information
exchange programme, a legal framework to authorise collection of such
financial information, an agency to administer the exchange of
information requirements. Work on some of these areas started in 2013
and significant steps have been taken till end of March 2015. Additional
steps are being taken to strengthen the information exchange programme.
India – policy decision
One of the first decision
points was whether India would participate in the FAT CA initiative
launched by the US. After examining possible consequences for the Indian
financial sector if India remains away and in light of India’s
commitment to global financial transparency, the Government of India
decided that it would enter into an IGA. As negotiation of tax treaties
and exchange of information was generally handled by the Ministry of
Finance (MoF), it was decided that the MoF would be the nodal agency for
FATCA and other similar financial information exchange initiatives.
From the second half of 2013 to early 2014, the MoF officials worked
with regulators in the Indian financial sector to determine what should
be the broad agreement with the US IRS. The principal regulators
involved in the consultation were the Reserve Bank of India (RBI), the
Securities and Exchange Board of India (SEBI) and the Insurance
Regulatory & Development Authority (IRDA). Based on this
consultation, an agreement ‘in substance’ was entered into in April
2014. One crucial administrative detail that remained was the formal
approval by the Union Cabinet supporting the signing of the final IGA.
This was scheduled for March 2014 but ultimately was obtained in March
2015.
Regulations
Before the IGA in substance was
entered into, one of the key questions before the Indian Government, the
regulators and before the FFIs was whether there was any regulatory
support for FFIs to send financial information in respect of their
clients to the US IRS directly. One school of thought was that Article
28(1) and 28(2) of the India-US Double Tax Avoidance (DTAA ) allowed the
exchange of information subject to the limitations under Article 28(3) –
for ease of reference, all three are reproduced below – at Government
to Government level but FFIs could not directly report to the US IRS.
1.
The competent authorities of the Contracting State shall exchange such
information (including documents) as is necessary for carrying out the
provisions of this Convention or of the domestic laws of the Contracting
States concerning taxes covered by the Convention insofar as the
taxation thereunder is not contrary to the Convention, in particular,
for the prevention of fraud or evasion, of such taxes. The exchange of
information is not restricted by Article 1 (General Scope). Any
information received by a Contracting State shall be treated as secret
in the same manner as information obtained under the domestic laws of
that State. However, if the information is originally regarded as secret
in the transmitting State, it shall be disclosed only to persons or
authorities (including Courts and administrative bodies) involved in the
assessment, collection, or administration of, the enforcement or
prosecution in respect of or the determination of appeals in relation
to, the taxes which are the subject of the Convention. Such persons or
authorities shall use the information only for such purposes, but may
disclose the information in public Court proceedings or in judicial
decisions. The competent authorities shall, through consultation,
develop appropriate conditions, methods and techniques concerning the
matters in respect of which such exchange of information shall be made,
including, where appropriate, exchange of information regarding tax
avoidance.
2. The exchange of information or documents shall be
either on a routine basis or on request with reference to particular
cases, or otherwise. The competent authorities of the Contracting States
shall agree from time to time on the list of information or documents
which shall be furnished on a routine basis.
3. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation :
(a)
to carry out administrative measures at variance with the laws and
administrative practice of that or of the other Contracting State;
(b)
to supply information which is not obtainable under the laws or in the
normal course of the administration of that or of the other Contracting
State;
(c) to supply information which would disclose any trade,
business, industrial, commercial, or professional secret or trade
process, or information the disclosure of which would be country to
public policy (ordre public).
The regulators, however, believed
that the statutes did not generally empower them to ask for financial
information of the type envisaged under FAT CA and that an amendment of
the statute was necessary. The Finance (No. 2) Act, 2015 amended the
Income-tax Act, 1961 by substituting new section 285BA for the earlier
section with effect from 1st April, 2015. This amendment also provides
for registration with the Government of India, of any reporting
institution, a provision that was absent in the old section 285BA.
Registration
Although
an FFI may be operating in an IGA Model 1 country like India and will
report through its host country Government, it is still required to
obtain the Global Intermediary Identification Number (GIIN) as an FFI.
Although India entered into an IGA in substance in early April 2014,
Indian regulators did not give the green signal to apply for GIIN in
April 2015 i.e. the cut-off date for getting the GIIN by June before the
FAT CA implementation date of 1st July, 2014. FFIs having multi-country
operations e.g. State Bank of India, however, applied for and obtained
GIIN in the first list. FFIs operating in India were treated as being
FAT CA compliant till 31st December, 2014 in terms of the IGA in
substance. On 30th December, 2014, both RBI and SEBI directed FFIs to
apply for and obtain GIIN by 1st January, 2015. The IRDA issued similar
instructions a little later. The stage was set for FFIs in India to
obtain GIIN.
Regulations
While section 285BA has been substituted with effect from 1st april, 2015, the rules and the data structure were not notified. It is India’s intention to have a common data structure and simplified framework to implement not only FATCA under the IGA model 1 requirements but also to accommodate the reporting requirements under the OECD’s Common reporting Standards (CRS). india is one of the early implementation countries for CRS and is expecting to implement CRS from 1st january, 2016 to cover persons of other nationalities besides uS persons who are covered for reporting under FATCA.
In late 2014, the mof circulated to a limited group, the draft version 3 of the proposed rules for CRS and fatCa for comments by stakeholders. in early 2015, the draft version 5 was similarly circulated for comments. the suggestions that have come in are currently under evaluation on the MOF side. It is understood that a reporting entity will obtain, apart from the 20-character GIIN under FATCA, a 16-character indian reporting entity identification number. This will be in addition to any Permanent account number (PAN) that the entity may have but will capture the PAN (or TAN) as part of the 16-characters. this requirement is broadly similar to that in the UK, where FATCA implementation under model 1 IGA has progressed further. The FFI will have to file separate reports in respect of different activities e.g. a bank maintaining bank accounts and also providing demat accounts will report the information for bank accounts separately from that relating to custody accounts. the nature of the reporting requirements and complications will also necessitate issuance of detailed guidance by the MOF.
Meanings of specific terms
Certain terms have been defined under the draft regulations. Some of the important ones are briefly discussed here.
A financial institution (hereinafter referred to as ‘fi’) is defined to mean a custodial institution, a depository institution, an investment entity or a specified insurance company. the terms ‘custodial institution’ and ‘depository institution’ are not directly defined. We have to derive the meaning indirectly from usage in the definition of ‘financial account’.
A ‘financial account’ means 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 under (iii); and
(v) cash value insurance contract or an annuity contract (subject to certain exceptions).
For this purpose, 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.
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
An ‘excluded account’ means
(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 $ 50,000 per annum or to $ 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 $ 50,000 per annum or to $ 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 31st december, 2015, there is a cap of $ 50,000 applicable for such overpayment.
Before any analysis of these definitions can be done in the India context, it is important to note the definition of ‘non-reporting financial institution’. 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) Retirement 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) An 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) An 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) An FI with a local client base or with low value accounts or a local bank;
(j) In case of any US reportable account, a controlled foreign corporation or sponsored investment entity or sponsored closely held investment vehicle.
An FI with a local client base is one that does not have a 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. The term ‘local bank’ will include cooperative credit societies. 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.
Due Diligence
The draft regulations provide for three categories of due diligence exercise in respect of client documentation under FATCA for accounts of US persons viz.
(i) new account due diligence (NADD);
(ii) Pre-existing account due diligence (PADD)
• For high value accounts i.e. where the balance is in excess of $ one million as at 30th june, 2014 or as at 31st december of any subsequent year;
• For low value accounts i.e. where the balance is in excess of $ 50,000 but does not exceed US$ one million as at 30th june, 2014 or as at 31st december of any subsequent year.
The methodology of the due diligence differs for these although the documentation requirements are broadly similar. For NADD, the residency certificate issued by the authorities overseas forms the primary evidence of tax residency. For Padd, the address on record should be treated as being the indicator of the tax residency. If the FI does not rely on current mailing address, it must do an electronic search of its records for identification of tax residency outside india, or a place of birth in the US, or a current mailing or residence address (including post office box) outside India, or one or more telephone numbers outside india and no telephone number in india, or standing instructions to transfer funds to an account maintained in a jurisdiction outside india, or power of attorney given to a person outside india, or ‘hold mail’ or ‘care of’ address outside india. all of these indicia may be overridden by specific declarations from the customer. The FI will not be entitled to rely on the customer’s self- declaration, if the fi knows or has reason to know that the self-certification or documentation is incorrect. An example of this is where an account holder who is ostensibly a resident of india informs the fi’s representative that he (the account holder) is uS ‘green card’ holder and has to visit the US to retain his green card this is a case where the fi has to ignore the local address in india and treat the account holder s being a US person. For high value accounts, enhanced due diligence is required to be done through the relationship manager meeting with the customer. Where any indicia show the account holder to be resident of more than one jurisdiction, the FI should treat the customer as being resident of each of the jurisdictions i.e. the FI shall not apply tie breaker tests. The Padd exercise must be completed by 30th june, 2015 for US reportable accounts and by 30th jun, 2016 for other accounts. For US reportable accounts, an FI is not required to do Padd (but may elect to do so) in respect of accounts where the depository account or the cash value of the insurance contract is up to $ 50,000 as at 31st december, 2014. For entity accounts (as opposed to individual accounts), the threshold cut off is $ 250,000 but the measurement date is 30th june, 20141. Once an account is identified as a US reportable account, it shall be continued to be treated in such a manner unless the indicia are appropriately cured at a later stage.
Reporting Deadlines
The draft regulations provide for reporting deadline of 31st july, 2015 for reporting to be done in respect for 2014 and as 31st may in later years. This reporting is, in terms of the model 1 IGA, to be done through the MOF.
Next Steps and Conclusion
The next steps, from the side of the Government, are signing of the IGA, issuance of the final regulations, notifying the data structure and setting up the infrastructure for receiving the reports. For the industry, the work has already begun with nadd and Padd. interim work on development of reporting systems is in progress but the UAT stages are held up for want of the final data structure from the Government side. Over the next few years, the fis will invest a lot of time and capital in the preparedness for financial transparency in respect of customer accounts in line with the expectations of the G20 nations, as we move beyond FATCA to the OECD’s Common reporting Standards (CRS).
