Points to note while reporting foreign assets

The nation waits with bated breath as the names of individuals found to be holding bank accounts in Liechtenstein are being disclosed. While that drama unfolds, there are many taxpayers in this country who remain unaware, either of their obligations to report foreign assets to the Indian tax authorities or how they could be impacted by non-compliance with such reporting requirements.

The implications of unaccounted money on an economy can be significant. It was to address the tax loss on account of non-disclosure of income earned from assets held abroad by Indian tax residents that important changes were brought into the Indian tax law in 2012.

The tax return forms to be used by tax residents of India, beginning from the Indian tax year 2011-12, were amended. The revised tax forms contain a schedule in which foreign assets, such as bank accounts or property held outside India by the taxpayer, are required to be reported. Non-disclosure or inaccurate disclosures may lead to penalties and may even invite prosecution.

Several other countries, notably the US, Brazil, Japan, China and Italy, mandate foreign asset reporting, with varying requirements that are easier to comply with in some countries and cumbersome in others. Surprisingly, India has joined this bandwagon early. There is some clarity required in the Indian tax law/tax form on the ‘assets’ required to be reported. Subjective interpretation on this reporting has led to varying levels of compliance.

While there are guidelines provided in the tax form, additional clarification on the meaning of an ‘asset’ and particularly identification of those assets that are not required to be reported, would be helpful in removing different interpretations by taxpayers. There are certain tax jurisdictions, such as the US and Japan, which have brought in clarity on the class of assets that ought to be reported and those that need not to be reported by taxpayers.

A number of employees who travel outside India on assignments, routinely open a foreign bank account while on assignment. Under the current Indian tax rules, all foreign bank accounts are required to be reported, without regard to considerations of materiality. Many taxpayers are unaware of the regulations surrounding reporting of such foreign assets and may therefore not be fully compliant with the Indian tax rules.

Reporting all assets, irrespective of their value, places an onerous obligation on taxpayers who wish to be fully compliant with the Indian tax law. It may be worthwhile for the Indian tax authorities to specify a threshold value of foreign assets, below which reporting could be made voluntary.

Currently, it is mandatory for ordinary tax residents of India to disclose foreign assets. The return forms require the disclosure of confidential information on foreign bank accounts.

These include the name of the foreign bank, the name used to open the account, the account number, and peak balance held at any time during the fiscal year.

Data theft is a significant concern that arises in the minds of taxpayers, especially since taxpayers are required to file their tax return form electronically. These concerns would need to be adequately addressed. Certain countries require similar foreign asset disclosures to be made to a banking authority, since confidentiality concerns may be better handled.

Self-reporting of foreign assets is only one of the measures implemented by the Indian tax authorities to gather information. This requirement is here to stay and taxpayers must remain fully informed of their changing obligations.

The writer is a partner (Tax) at KPMG. Rohini Ramya contributed to the article. The views are personal