HSBC and NRI Bank Accounts: Could It Spread to Other Banks?

The US Internal Revenue Service (IRS) has asked HSBC Bank to provide information on incomes of US residents who may be using accounts in India to evade income taxes.

The move has raised several questions. First, why did US authorities single out HSBC? Second, would US IRS also approach banks like State Bank of India and Citibank for information?

Responding to questions on what steps the US IRS was likely to take in its investigation, a spokesperson for the US Embassy press office in India has said, “ As a rule, the IRS doesn’t comment on ongoing investigations”.

On April 7, US authorities sought an order from a federal court in San Francisco, authorising the US IRS to request for information from HSBC Bank, USA, on US residents who may be using accounts at HSBC India to evade federal income taxes. The US government had filed a petition with the court to allow the IRS to serve what is called a ‘John Doe’ summons on the bank and had, subsequently, secured the approval. The summons seek to obtain information to help US authorities determine if additional actions are needed.

The IRS uses John Doe summons to obtain information about possible tax frauds by people whose identities are unknown. It has directed HSBC USA to produce records identifying US taxpayers with accounts at HSBC India. The US government believes many of these account holders have kept their accounts hidden from the IRS. When contacted, an HSBC spokesperson said, “HSBC does not condone tax evasion and fully supports US efforts to promote appropriate payment of taxes by US taxpayers.”

US laws require taxpayers to pay federal income taxes on all income earned worldwide and report foreign financial accounts if their total value exceeds $10,000 at any time. A failure to report a foreign account may result in a penalty of up to 50 per cent of the amount in the account at the time of the violation.

The issue assumes significance, since the US IRS 2011 Voluntary Disclosure Program expires on August 31. A failure to disclose incomes by HSBC account holders before that date would result in severe action, apart from the penalty, if information by HSBC proves such people guilty.

On the possibility of support from the Indian government with regard to Indian banks, a finance ministry official said the US may seek such information from India under the Double Taxation Avoidance Agreement (the US-India Tax Treaty). Banks which have a branch, a subsidiary or a representative office in the US, may come under pressure. Information on accounts of US citizens of Indian origin may be directly sought from these banks, the way information was sought from Swiss bank UBS.

For information from Indian banks which are not present in the US, the US would have to approach the foreign taxation division in the Central Board of Direct Taxes under the finance ministry.

Income tax department officials say banks have to deduct TDS (tax deduction at source) on bank accounts of US citizens in India. These account holders can then seek credit (exemption) for that in the US.

Undoubtedly, the whole issue has brought out in the open the fact that banks helping their customers in evading tax in any jurisdiction is not a profitable business any more.

What led IRS to HSBC? The US IRS decided to approach HSBC after securing actionable intelligence and information on the matter. A US Justice Department press release issued on April 7, which sought permission to approach HSBC, said according to documents filed with the government’s petition on January 26, a jury in Newark, New Jersey, indicted Vaibhav Dahake of Somerset. He was charged with conspiracy to defraud the United States by using undeclared accounts in the British Virgin Islands and HSBC India to evade his income taxes.

“According to those documents, employees of HSBC Holdings and its affiliates operating in the United States assured Dahake that accounts maintained in India would not be reported to the IRS,” said the US Justice Department. “The government alleges that, according to HSBC’s website, in 2002, HSBC India opened a ‘representative office’ at an HSBC USA office in New York City to enable non-resident Indians (NRIs) living in the United States to open accounts in India,” it said.

The US Justice Department said in 2007, HSBC India allegedly opened a second representative office at an HSBC USA office in Fremont, California, purportedly “to make banking transactions more convenient for the NRI community based in California.” “Although HSBC India closed those offices in June 2010, the government alleges NRI clients may still access their accounts at HSBC India from the United States,” it said.

According to the petition documents, NRI clients told IRS investigators bank representatives in the United States told them they could open accounts at HSBC India. This would help them avoid paying income tax in the US on interest earned on these accounts and that HSBC would not report the income earned on HSBC India accounts to the IRS.

Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimze) foreign accounts.