India Expected to Sign FATCA Agreement Tomorrow

India is expected to sign an inter-governmental agreement (IGA) for the US tax compliance law Foreign Account Tax Compliance Act (FATCA) tomorrow.

FATCA is aimed at combating possible tax evasion by Americans through financial entities of other countries. FATCA is a U.S. law which seeks to facilitate flow of financial information. FATCA requires Indian banks to reveal account information of persons connected to the U.S.  Non-compliant financial institutions could be frozen out of U.S. markets and subjected to punitive withholding taxes.  If a financial institution does not comply with FATCA, it would have to pay 30 per cent penalty tax on all its US revenues, including dividend, interest, fees and sales.

The IGA is likely to be signed by Revenue Secretary Shaktikanta Das and US Ambassador Richard Verma on July 9, 2015.

Foreign financial institutions (FFIs) in India, i.e. an insurance company, bank, or mutual fund, would be required to report all FATCA-related information to Indian governmental agencies, which would then report these information to Internal Revenue Service (IRS).  Foreign Financial Institutions must report account numbers, balances, names, addresses, and U.S. identification numbers.

India agreed to sign a Model 1 FATCA Model Intergovernmental Agreement (IGA) with the U.S.  The IGA would likely require Indian financial institutions to report information on U.S. account holders to India’s Central Board of Direct Taxes, which would then share the information with the U.S. Internal Revenue Service (IRS).  The agreement would provide the Internal Revenue Service (IRS), access to details of all offshore accounts and assets beyond a threshold limit held by Americans here, while a reciprocal arrangement would be offered for Indian authorities as well.

India is expected to start receiving information through Automatic Exchange of Information (AEOI) route under FATCA from the US later in the year.

FATCA compliance will cover all new accounts opened by Indian financial institutions from July 1, 2014 onwards. Indian financial institutions must share data with the government in respect of all new accounts opened from July 1 till December 31, 2014, to enable the government to share this data with US by September 30, 2015 .  Indian financial sector regulators, including SEBI and CBDT, are expected to shortly publish regulations for implementation of FATCA.

Who is Reported?

Many Indian financial institutions have already registered on the IRS’s FATCA Registration Portal. The IRS has published a searchable list of financial institutions. The FFI List Search and Download Tool is located on the IRS’s FATCA website. The tool can be used to search for the name of a specific foreign financial institution and find out if it has registered under FATCA. As of today, over 714 financial institutions in India have registered with the IRS.  Users can also download an entire list of financial institutions with the tool. See the FFI List Search and Download Tool and User Guide. Countries complying withFATCA can be found at FATCA – Archive.

Financial institutions in India will carry out a detailed due diligence on all their clients and report details of their U.S. clients to the Internal Revenue Service.  U.S. persons for tax purposes are generally considered as:

• A citizen of the U.S. (including an individual born in the U.S. but resident in another country, who has not renounced U.S. citizenship);
• A lawful resident of the U.S. (including any U.S. green card holder);
• Most U.S. visa holders (including H-1 and L-1 visa holders);
• A person residing in the U.S.
• Somebody who has spent considerable period of time in the U.S.
• American corporations, estates and trusts may also be considered U.S. persons

Which Accounts?

Indian financial institutions need to report certain accounts to the IRS under FATCA. The need for identifying U.S. person(s) arises from the fact that money invested in India needs to be reported to IRS in the U.S.  While the threshold limit for reporting will be specified by the regulators in India based on FATCA regulations, institutions will have reporting requirements under FATCA, in terms of threshold limits.

As per FATCA, U.S. persons need to report to IRS in the following scenarios:

• If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year.
• The threshold is higher for individuals who live outside the U.S. .
• Thresholds are different for married and single taxpayers.

There is a provision for third party reporting under FATCA for FFIs which states, “Foreign financial institutions may provide to the IRS, third-party information reporting about financial accounts, including the identity and certain financial information associated with the account, which they maintain offshore on behalf of U.S. individual account holders”.

While the IRS has recently targeted Swiss, Israeli and Indian banks, India continues to be a focal point for the U.S.  government. While new criminal prosecutions start and continue, our law firm expects unabated aggressive enforcement of the U.S. tax laws, including increased criminal prosecutions and civil investigations. We have been advising our clients to expect the unexpected (and the worst) in their tax treatment and disclosure of offshore assets, particularly for Indian assets.

The fact that 77,000 banks have registered and over 100 countries will be providing government help to the IRS means that no foreign account is secret. U.S. persons must report worldwide income and most must file IRS Form 8938 and Foreign Bank Account Reports (FBAR) to report foreign accounts and assets. With such comprehensive databases, noncompliant taxpayers should beware; the government has better and more complete information than ever.  Significant penalties apply (and possibly criminal prosecution) for failure to file required forms.

Patel Law Offices has consulted with hundreds of clients regarding their offshore asset compliance issues. 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 legitimize) foreign accounts.

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