The US Government introduced the Foreign Account Tax Compliance Act (FATCA) in 2010 primarily to check offshore tax evasion, particularly by US citizens and Green Card holders with overseas assets. The Act puts the onus on banks and financial institutions globally to act as intermediaries and disclose such assets and transactions to the US Internal Revenue Service.
Key implications
FATCA requires financial institutions (both US and non-US) to classify account holders as US or non-US, individuals or entities, and financial or non-financial entities.
Financial/ non-financial institutions that do not comply face 30 per cent withholding tax on a wide range of revenue they earn from US clients. A 30 per cent withholding will apply to all US source dividend and interest payments plus the gross proceeds from the sale of an asset that gives rise to US source income if paid to either a “recalcitrant” account holder, “non-participating FFI” or an NFFE that has not disclosed its substantial US owners. In addition, US FIs and FFIs will be liable for any tax they failed to withhold, plus interest and potential penalties
Key dates
The IRS is expected to open its FFI registration portal by July 15, 2013. The last date for registration is October 25, 2013.
FFIs would be expected to comply with US withholding obligations and new on-boarding procedures from January 1, 2014.
Intergovernmental agreements
To foster international co-operation, the US Treasury Department collaborated with foreign governments to develop and sign intergovernmental agreements (IGAs) that facilitate effective implementation of FATCA by eliminating legal barriers to participation, reducing administrative burdens, and ensuring the participation of all non-exempt financial institutions in a partner jurisdiction. The US Treasury released two versions of model IGAs.
Under model I, the “FATCA Partner” government is tasked with collecting information from resident FFIs and reporting it to US authorities. Currently, the UK, Mexico, Denmark and Ireland have adopted the reciprocal version of this agreement. The FIs in these countries have to report to their home jurisdiction and need not deal directly with the US IRS.
Model II IGAs are for countries that see domestic legal or administrative impediments to entering a model I agreement. Here the FFI would report directly to the IRS with minimal involvement of the foreign government.
Key benefits of the IGA include elimination of withholding tax risks. Currently, the US is actively engaged with over 50 countries for such IGAs, including India.
Impact in India
Indian and multinational FIs would face challenges in coordinating the impact of FATCA across business operations. India’s current Know Your Client procedures may not be sufficient to identify US citizens and US-resident clients. Account opening processes and transaction processing systems will have to change significantly. An ongoing reporting, testing and monitoring process would be needed to sustain FATCA compliance.
Indian banks and FIs will face increased implementation costs. FATCA compliances may impact operations, processes and systems from client on-boarding to statutory reporting.
Indian NFFE
Non-financial foreign entities or NFFEs include, but are not limited to non-US corporations, partnerships and trusts. They can avoid the 30 per cent withholding tax if they
certify to the US withholding agent that they do not have substantial US owners; or
provide the name, TIN (Tax Information Network) and other information on their substantial US owners.
Thus, Indian corporations/ partnerships/ trusts which have US owners exceeding a specified ownership threshold should comply with the FATCA reporting provisions if such entities receive any US sourced income.
NRI and US citizen
FATCA imposes new reporting requirements on US citizens/ US resident individuals who hold an interest in specified foreign financial assets (SFFAs), which include
Financial accounts such as bank accounts, mutual funds, and so on;
Stock or securities issued by a foreign person, including companies and partnerships;
Financial instrument with a foreign issuer;
Interests in a foreign entity, such as a corporation, partnership, trust, or estate;
Real estate held through a foreign entity.
Thus, US citizens/ US resident individuals residing in India should report their interests if they exceed the filing threshold prescribed.
Indian banks and FIs may need to intensify their KYC requirements and register with the US IRS individually if there is no bilateral agreement between the two countries. They will need to undertake prescribed identification exercise for US taxpayers and report annually to the US IRS.
(Kanchan Patil, Manager, US Taxation, contributed to the article.)
(The author is Director, US Tax, Grant Thornton India LLP)