FATCA and CRS

FATCA is the acronym for Foreign Account Tax Compliance Act, which was introduced in the United States (US) legislature in October 2009. The broad provisions of FATCA are found in Sections 1471 to 1474 of the (US) Internal Revenue Code, 1986 as amended from time to time and under regulations issued. FATCA is intended to increase transparency with respect to US taxpayers investing or earning income through non-US institutions and non-US investment entities. FATCA creates a tax information reporting regime under which financial institutions (FIs), both US (USFIs) and foreign (FFIs) are expected to report certain financial information in respect of a US taxpayer (generally referred to as a ‘US person’). If an FI does not report such information, the FI could be subject to 30% withholding in respect of its own US sourced income. FATCA came into effect in two stages on July 1, 2014 and on January 1, 2015. The G20 endorsed the need for transparency and the OECD even mooted the idea of a multilateral tax information exchange agreement (TIEA). The OECD issued a recommended approach on Common Reporting Standard (CRS) for adoption by countries.

FATCA and CRS in India

The Finance (No. 2) Act, 2015 amended the Income-tax Act, 1961 by substituting new Section 285BA for the earlier section with effect from April 1, 2015. 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) in June 2015. For FATCA, the Government of India signed the Model 1 Inter-Governmental Agreement (IGA) on July 9, 2015. Under India’s IGA, all reporting is done to the Government of India which, in turn, will pass on the information to the US. Rules 114F to 114G for reporting under Section 285BA were notified on August 7, 2015 and the first reporting deadline in respect of records for 2014 was set at August 31, 2015 (later extended to September 10, 2015). The initial guidance was issued on August 31, 2015 and a guidance note was issued on December 31, 2015. Further clarifications were issued on February 19, 2016.

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 which is resident (the reference here is to tax residence status) in India but excluding a branch outside India of an Indian FI

– Any 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 Non Participating FI) 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, -

1. 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;

2. Retirement funds of the Government, international organisation, central bank at (a) above;

3. A non-public fund of the armed forces, an employee state insurance fund, a gratuity fund or a provident fund;

4. An entity which is Indian FI solely because of its direct equity or debt interest in the (a) to (c) above;

5. A qualified credit card issuer;

6. 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;

7. An exempt collective investment vehicle;

8. (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;

9. (i) An FI with a local client base;

10. (j) A local bank;

11. (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 up 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 co-operative 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 ₹ 1,050 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
₹ 3,000 crores). Certain other conditions also apply.

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.

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). For the 2015 reporting due in May 2016 and for later years, the reporting FI must also register on the e-filing website and obtain an ITDREIN. This requirement did not apply for the 2014 reporting done in September 2015. In addition, the reporting FIs may have to obtain a US Global Intermediary Identification Number (GIIN), a 20 character registration, so as not to be treated as an NPFI.

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.

FFIs and US person

FATCA requires reporting by FFIs in respect of certain financial transactions of US persons. The term ‘foreign financial institution’ is very broadly defined and encompasses a number of entities that have not traditionally been considered to be financial institutions. An FFI is any entity organised in a country (including a US possession) other than the US that:

• Accepts deposits in the ordinary course of banking or similar business; or

• As a substantial portion of its business, holds financial assets for the account of others; or

• Is an investment entity; or

• Is an insurance company (or the holding company of an insurance company) that issues or is obligated to make payments with respect to a cash value insurance or annuity contract; or

• Is an entity that is a holding company or treasury centre that is part of an expanded affiliated group that includes a depository institution, a custodial institution, a specified insurance company or an investment entity or is formed in connection with (or availed of by) a collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund, venture capital fund, leveraged buyout fund or similar investment vehicle.

As we can see above, the coverage is quite wide and the definition quite complex. There are certain exclusions e.g. group entities that are non-financial foreign entities (NFFEs) and non-financial start-up companies for the first 24 months after the latter type of entities are organised. We now turn to who or what is a US person. The term ‘US person’ means:

• An individual who is a US citizen or resident of the US; or

• A partnership created or organised under the laws of the US or a State of the US; or

• A corporation created or organised under the laws of the US or a State of the US; or

• An estate of the decedent, who is a US person; or

• Any trust if:

1. 1A court within the US is able to exercise primary supervision over the administration of the trust (i.e. the “Court test”); and

2. One or more US persons have the authority to control all substantial decisions of the trust (i.e. the ‘Control test”); or

• The Government of the US, any State, municipality or other political sub-division, any wholly owned agency or instrumentality of such governments.

Registration of FFI and FFI agreement

An FFI is, on application to be made electronically, allotted a ‘Global Intermediary Identification Number’ (GIIN). The GIIN is 20 character identification unique to each FFI. An FFI, whose application for GIIN is under process with the IRS, may provide a Form W-8 to its counterparty and state that it has ‘applied for’ against the GIIN field. Such a Form W-8 will be valid for 90 days during which it is expected that the FFI will be granted the GIIN.

An FFI will agree with the IRS to undertake, amongst others, account holder due diligence, reporting and withholding. The nature of the obligations of the FFI varies depending upon whether the FFI is located in an IGA country or outside.

An FFI which agrees to sign (or signs) the agreement with the US IRS is called a participating FFI (PFFI) and one which does not do so in non-participating FFI (NPFFI). A PFFI may also agree that it will do the FATCA reporting on behalf of any other FFI within the group.

Account holder due diligence

To capture information about whether the account holder is a US person, FATCA allows for FIs to accept customer self-declarations. The FI is expected to make sufficient due diligence in respect of new accounts (NADD) opened after the coming into force of FATCA. It also requires the institutions to do due diligence in respect of pre-existing accounts (PADD). In particular, the due diligence has to focus on US indicia appearing in the data relating to accounts of individuals. Generally, US indicia in the context of individual accounts are one or more of the following viz.

• US citizenship

• Lawful permanent resident of the US (i.e. a non-US citizen with a ‘green card’)

• US place of birth

• Residence address or correspondence address in the US (this could include a US post box office)

• US telephone number with no non-US telephone number associated with the account

• Standing instructions to transfer funds to an account in the US

• Current power of attorney or signatory authority granted to a person with a US address

• ‘Care of’ mailing address is the sole address for the account or ‘Hold mail’ instruction applies in respect of the account.

In such cases, the institution has to exercise additional due diligence and obtain appropriate ‘cure’ documentation, which differs on the basis of the nature of the defect. For example, US citizenship cannot be ignored unless the US certifies that the individual concerned has given up his US citizenship. In the absence of cure documentation, it is presumed that the Account holder is a US person. For non-individuals, the NADD, PADD focuses on whether the entity is an FFI or it is non-financial foreign entity (NFFE). An FFI will have to provide its GIIN whereas an NFFE will have to provide information about its ownership in particular whether it has US person(s) having substantial i.e. greater than 10% interest in the NFFE.

An account holder with a PFFI

• Who or which is not an FFI and who fails to comply with reasonable requests for information necessary to determine if the account is held by a US person; or

• Fails to provide a valid self-declaration of being a US person (Form W-9); or

• Fails to provide the correct name and (US) Tax Identification Number (TIN) combination; or

• Fails to waive the secrecy law which would prevent the participating FFI from reporting information required to reported under FATCA; or

• Is an NFFE which fails to provide the required certification regarding substantial US owners or lack of such ownership; or

• Has a dormant account is treated as a ‘recalcitrant account holder’.

To address a Hindu Undivided Family (HUF), which is a traditional family institution peculiar to India, the Government has clarified that an HUF is to be treated as entity.

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

1. 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

2. 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 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.

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, –

(l) 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;

(m) Retirement funds of the Government, international organisation, central bank at (a) above;

(n) A non-public fund of the armed forces, an employee state insurance fund, a gratuity fund or a provident fund;

(o) An entity which is Indian FI solely because of its direct equity or debt interest in the (a) to (c) above;

(p) A qualified credit card issuer;

(q) 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;

(r) An exempt collective investment vehicle;

(s) 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;

(t) An FI with a local client base or with low value accounts or a local bank;

(u) 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 co-operative 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.

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,

(c) In the case of a partnership, share in the capital or share in the profits of the partnership; and

(d) 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

(c) 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

(d) 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

(viii) 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.

(ix) 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.

(x) An account under the Senior Citizens Savings Scheme, 2004;

(xi) A life insurance contract that will end before the insured reaches the age of 90 years (subject to certain conditions to be satisfied);

(xii) 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;

(xiii) 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;

(xiv) 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.

Due diligence

Rule 114H provides for different deadlines for categories of due diligence exercise in respect of client documentation under FATCA/ CRS for financial accounts viz.

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 holders 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.