By Rajesh H. Dhruva, Darshita M. Sanghvi
Chartered Accountants
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Introduction
Ensuring tax compliance and establishing tax discipline is the basic objective of lawmakers and for some unexplained reasons, jumping the tax payments is many tax payers’ delight across the world. Eventually when law enforcers realise the weakness of the stick, they offer carrots of amnesty schemes now and then and the United States of America is no exception.
In 2009 and 2011 the Internal Revenue Service (IRS) offered schemes of Overseas Voluntary Disclosure Initiatives (OVDI) for tax defaulters to come clean about paying their taxes on their hitherto undisclosed foreign income and also to adhere to the requirements of yearly disclosure of foreign financial assets under the Foreign Bank Account Reporting (FBAR). Having received a lukewarm response to the OVDI, the IRS introduced Overseas Voluntary Disclosure Programme (OVDP), which is presently open. Apart from this, Foreign Assets Tax Compliance Act (FATCA) has become effective from the year 2011.
Under FATCA, tax payers who are US citizens, Green Card holders or resident aliens are required to declare their foreign financial assets to the IRS. However, through FATCA, US lawmakers have, probably for the first time, also sought to stretch the geographical limits of the IRS jurisdiction to almost all the nations, and the responsibility of collecting taxpayer’s information is cast on global institutions. No doubt, Double Tax Treaties grant abundant rights to tax authorities to seek tax payer’s information, but FATCA turns the tables by entrusting the responsibility of collecting and providing information as regarding financial affairs of all US citizens and US address accounts on banks, mutual funds, insurance companies, broking houses and other financial institutions across the world, thereby tightening the IRS grip to control possible tax evasion.
[http://www.treasury.gov/press-center/press-releases/ Pages/tg1759.aspx]
Effective 1st January, 2014 many Non-Resident Indians (NRI) of US who by ignorance or otherwise have failed to submit FBAR and FATCA reports or declare Indian income in US tax returns may face punitive action. It would therefore, be prudent for every NRI to understand and address these important changes being implemented next year. The most innocent mistake NRIs residing in the US tend to make is the non-declaration of their Indian assets owned prior to migration and financial assets inherited or received through partition of family which are otherwise covered by reporting requirements of FBAR and FATCA and non-payment of tax on income generated out of such assets.
US Engaging with India for compliance
US Treasury has initiated the signing of agreements with various Governments requiring domestic financial institutions operating in their country to provide requisite information for the calendar year 2013 of all US citizens and US addressee customers to the IRS from 1st January, 2014. While governments of UK, Denmark and Mexico have already signed such an agreement. France, Germany, Spain, and Italy are in the process of concluding the agreements. Efforts are being made to enter into similar agreements with many other countries.
As posted in the US Embassy report, US Treasury Secretary Mr. Timothy Geithner and US Federal Reserve Chairman Mr. Ben Bernanke met the Finance Minister of India and the Prime Minister of India on the 9th October, 2012 and discussed various options and possible actions for combating tax evasion by US-based NRIs.[http://newdelhi.usembassy.gov/sr100913.html].
As a consequence, the Reserve Bank of India has been asked to draft a domestic legislation requiring Indian banks, mutual funds, insurance companies, broking houses and other financial institutions to provide information of investments of US citizens and US addressees to the IRS from 1st January, 2014. [http://articles.economictimes.indiatimes.com/2012-11- 27/news/35385827_1_financial-assets-fatca-financialinstitutions ]
To take an overview of the subject, salient features of the FBAR, FATCA and taxability of global income under US tax laws are briefly discussed below.
FBAR
It is a simple form to collect basic information of US citizens or US residents of their overseas financial accounts in their names or wherein they have signing authority or control.
Applicability: The FBAR is required to be filed by a person who is a US citizen, resident of US, a US partnership firm, a Limited Liability Company (LLC) or trust (referred as United States Person) which has financial interest or signing authority in overseas financial investment exceeding INR621,672 during a calendar year. It may be noted that filing of tax returns jointly by a married couple is common in US but the limit of INR621,672 is for each individual.
Foreign Financial Account:
It includes all accounts maintained with a financial institution and also includes:
• Securities or brokerage account;
• Bank account including savings, current or deposits held as NRE, NRO, FCNR account and also Resident account.
• Commodity Futures & Options Accounts;
• Whole life insurance policy and any annuity with cash value;
• Mutual fund or similar pooled fund and
• Any account maintained with a foreign financial institution or other person performing the services of a financial institution. It may be noted that investment in a partnership or proprietorship firm, private limited company, personal loans and personal assets like jewellery are not included and hence not required to be reported. Immovable properties are also not covered under FBAR but bank balances generated by funds remitted for purchase of immovable property in India need to be reported. Financial Interest: A United States person is said to have a financial interest in a foreign financial account if:
• He is the owner of record or holder of legal title, or
• The owner of record or holder of legal title is another person who may be:
a) an agent, nominee, attorney or a person acting on behalf of the US person with respect to the account;
b) a corporation/company in which the US person owns directly or indirectly more than 50% of the total value of shares or voting power;
c) a partnership in which the US person owns directly or indirectly or has interest greater than 50% of the profits or capital;
d) a trust of which the US person is the trust grantor and has an ownership interest in the trust for US federal tax purposes;
e) a trust in which the US person has a more than 50% beneficial interest in the assets or income of the trust for the calendar year; or
f) any other entity in which the US person owns directly or indirectly more than 50% of the voting power or total value of equity interest or total assets or interest in profits.
Joint Owners: A husband and wife owning a joint account need not file separate reports. But if either spouse has a financial interest in any other account not held jointly then such a person should file a separate report for all accounts including those owned jointly with the spouse.
Form and Filing: The report is to be submitted in form TD F 90-22.1 with the US Department of the Treasury, Detroit by June 30 of the following year.
Penalty: Improper filing of FBAR attracts penalty of $10,000 whereas wilful failure to file FBAR is liable to penalty of greater of $100,000 or 50% of the balance at the time of violation and also is subjected to criminal penalties.
FATCA
FATCA is enacted with the primary goal to gain information about US persons and requires US persons to report their foreign financial assets to the IRS and also requires foreign financial institutions to report directly to the IRS details of financial accounts of US persons held with them.
Applicability: Individuals who are US citizens, tax residents, non-residents who elect to be resident aliens and non-residents who are bonafide residents of American Samoa or Puerto Rico having foreign financial assets above the threshold limit.
Foreign Financial Assets: It includes following financial assets:
• Checking, savings and deposit accounts with banks held as NRE, NRO, FCNR or Resident accounts;
• Brokerage accounts held with brokers & dealers;
• Stocks or securities issued by a foreign corporation;
• Note, bond or debenture issued by a foreign person;
• Swaps of all kinds including interest rate, currency, equity, index, commodity and similar agreements with a foreign counterparty;
• Options or other derivative instruments of any currency, commodity or any other kind that is entered into with a foreign counterparty or issuer;
• Partnership interest in a foreign partnership;
• Interest in a foreign retirement plan or deferred compensation plan;
• Interest in a foreign estate;
• Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value; and
• Any account maintained with a foreign financial institution and every foreign financial asset, income or gain whereof is to be reported in the tax return to be filed with the IRS.
It is significant to note, that unlike FBAR, FATCA covers investments of any and every size in equity shares of a private limited company, capital in partnership or proprietorship, loans and advances including personal loans, etc. Immovable properties are excluded. If the US person is not required to file US tax return for any reason, then he is not required to file the FATCA report.
Both FBAR and FATCA cover erstwhile investments in India and inherited or partitioned family assets.
Reporting Threshold: Individuals are covered by FATCA if the value of foreign financial assets exceeds $50,000 as on 31st December or $75,000 during the tax year and in case of married couple tax-payers $100,000 and $150,000 respectively.
For individual tax-payers living abroad these limits are raised to $200,000 and $300,000 respectively and $400,000 and $600,000 for a married couple filing joint return.
Joint Owners: The tax return of a married couple will include assets of both the spouses.
Form and Filing: The report is to be submitted in form 8938 with the IRS with the tax return. The due dates for filing tax returns with the IRS including extension provisions will apply accordingly.
Penalty: Failure to file Form 8938 by the due date or filing an incomplete form attracts a penalty of $10,000. Additional penalty of $10,000 per month up to a maximum penalty of $ 50,000 may become payable for failure to file inspite of IRS notice.
Tax Withholding: FATCA also requires 30% tax withholding on certain payments of US source income paid to non participating foreign financial institution or account holders who fail to provide requisite information. [http://www.irs.gov/uac/Treasury,-IRS-Issue-Proposed-Regulations-for-FATCA-Implementation]
Global Income of US Persons being Taxed in the US
Internal Revenue Code (IRC) requires a US citizen irrespective of his place of residence or resident of the US to declare and pay income tax on worldwide income. Of course, taxpayers having income in India can choose between the IRC and the regulations of India-USA Double Tax Treaty for income arising in India, and opt to be governed by provisions which are more beneficial to him, subject to conditions as may be applicable.
US Offshore Voluntary Disclosure Programme
The IRS has once again given an opportunity for voluntary disclosure of overseas assets and income thereon under the OVDP.
The OVDP is similar to the earlier OVDI under which tax payers are required to pay tax on hitherto undisclosed income of earlier eight tax years together with interest thereon, and in addition to a penalty of 27.5% of the highest balance of hitherto undisclosed foreign bank accounts and/or value of foreign assets over the last eight years. For balance upto $ 75,000 reduced penalty of 12.5% applies. In cases of tax payers disclosing and paying tax on foreign incomes but failing only to file FBAR returns, delinquent reports may be filed possibly saving oneself from penal provisions. [http://www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-Program]
Many NRIs may not have abided by the FBAR provisions and few by ignorance have also failed to pay tax on their Indian income in the US but ignorance of law cannot be an excuse, and therefore, it would be appropriate for US-based NRIs and Chartered Accountants advising them to take advantage of the OVDP before the programme is discontinued.
