FATCA/CRS Overview – In Indian Context

In 2010, USA enacted a law known as “Foreign Account Tax Compliance Act” (FATCA) with the objective of tackling tax evasion through obtaining information in respect of offshore financial accounts maintained by USA residents and citizens. Since domestic laws of sovereign countries (including India) may not permit sharing of customers’ confidential information by FIs directly with USA, USA has entered into Inter Governmental Agreement (IGA) with various countries. The IGA between India and USA was signed on July 9th 2015. It provides that the Indian FIs will provide necessary information to the Indian tax authorities, which will then be transmitted to USA periodically. Under the IGA, USA will also provide substantial information about Indians having financial assets in USA.

Under the Foreign Accounts Tax Compliance Act (FATCA), U.S citizens must report information about their foreign financial accounts to the Internal Revenue Service (IRS) annually. The information reported under FATCA must be filed annually with the IRS, typically on Form 8938, “Statement of Specified Foreign Financial Assets.” U.S. citizens who are required to report their foreign financial accounts must ensure that they comply with the reporting requirements, as failure to do so can result in significant penalties and fines. The hardest part of FATCA is determining which assets need to be reported, making it one of the most confusing aspects of the law.

The information required to be reported includes:

  • Account Information: Information about each foreign financial account held by the taxpayer, including the name of the financial institution where the account is held, the account number, and the maximum value of the account during the year.
  • Taxpayer Identification Number: The taxpayer’s U.S. taxpayer identification number could be their Social Security number or taxpayer identification number.
  • Country of Residence: The taxpayer’s country of residence and the countries in which the foreign financial accounts are located.
  • Signature Authority: Information about whether the taxpayer has signature authority over the foreign financial accounts.
  • Assets: Details of foreign assets, including foreign pensions, stockholdings, partnership interests, financial accounts, mutual funds, issued life insurance, hedge funds, and real estate held through a foreign entity, must also be reported to the IRS. However, a taxpayer’s foreign home does not need to be reported.

The implementation of FATCA has been challenging for both U.S citizens living abroad and for foreign financial institutions. However, it has also been seen as a positive step towards greater transparency in the global financial system and a means of preventing tax evasion. The law has been instrumental in encouraging greater cooperation between countries in sharing financial information, which has led to a more robust and effective system for detecting tax evasion and other financial crimes.

Further, to combat the problem of offshore tax evasion and avoidance and stashing of unaccounted money abroad requiring cooperation amongst tax authorities, the G20 and OECD countries working together developed a Common Reporting Standard (CRS) on Automatic Exchange of Information (AEOI). The CRS on AEOI was presented to G20 Leaders in Brisbane on November 16th 2014.

The Hon’ble Prime Minister of India, speaking on the occasion, supported the new global standard as it would be instrumental in getting information about unaccounted money hoarded abroad and in its eventual repatriation. The CRS on AEOI requires the financial institutions of the “Source” jurisdiction to collect and report information to their tax authorities about account holders “Resident” in other countries, such information having to be transmitted “Automatically’ on yearly basis. The information to be exchanged relates not only to individuals but also to shell companies and trusts having beneficial ownership or interest in the “Resident” countries. Further, the reporting needs to be done for a wide range of financial products, by a wide variety of financial institutions including banks, depository institutions, collective investment vehicles and insurance companies.

In keeping with its leadership role in developing the new global standard, India is one of the early adopters of the CRS and has committed to exchange information automatically by 2017. The Government of India has also, on June 3rd 2015, joined the Multilateral Competent Authority Agreement (MCAA) for exchanging information as per the above timelines.

In view of commitment to implement the CRS on AEOI and also the IGA with USA, and with a view to provide information to other countries, necessary legislative changes have been made through Finance (No. 2) Act, 2014, by amending Section 285BA of the Income Tax Act, 1961. Income Tax Rules, 1962 were amended vide Notification No.62 of 2015 dated August 7th 2015 by inserting Rules 114F to 114H and Form 61B to provide a legal basis for the Reporting Financial Institutions (RFIs) for maintaining and reporting information about the Reportable Accounts. These Rules have been developed in consultation with Regulators and Financial Institutions in order to address their concerns wherever possible.

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