Today I am going to discuss about the broad provisions of CRS & FATCA, which are two of the most important recent developments in recent history w.r.t. cross border taxation. Unfortunately, there has been a lot of panic reaction over the past few years with people taking knee jerk reaction & selling assets in India. One part of it is because of irresponsible media stories and other part is due to lack of full knowledge of the implications of these legislations.
Before we move ahead, READ THIS
FATCA & CRS are voluminous legislations. Apart from what I am going to explain here, there are also very specific guidelines on a lot of this. In fact, the CBDT guidance note for Indian financial institutions runs into some 300+ pages.
However, note that most of the information is relevant for financial institutions & NOT FOR YOU. What is relevant for you is the following:
- Understand your tax residency status properly (Also read: How NRI/PIOs can decode the Indian tax residency rules & save tax AND USA based NRIs: Know about IRS tax residency rules
- Understand the taxability of income clearly – every country has different rules of taxation –understand this: FATCA & CRS are just rules on exchange of information between governments of different countries. The tax laws of each country & the DTAA, if any, will continue to determine the taxability aspect.
- Disclose all incomes that you need to, as per a country’s tax laws
- Understand the DTAA provisions between countries & avail only if expressly available
- Understand reporting obligations to tax authorities in your country of residence (especially the IRS of USA)
If you do all of this, you can skip to the last section on “Implication for NRIs”. In this post, my objective is to explain the main provisions and implications clearly so that you can take rational investment and tax compliance decisions. Also remember, if you are stuck, don’t procrastinate and seek advice from a CA/ CPA professional now: it can save you a lot of hassle and pain later!
Common Reporting Standards (CRS): An Overview
- To combat offshore tax evasion, G20 and OECD countries are working together to develop a Common Reporting Standard (CRS) on Automated Exchange of Information (AEOI). India is one of the early adopters of CRS.
- As per the CRS, financial institutions in country of source income will collect and report it to the tax authorities of that country, which in turn will relay it to the tax authority of country where the person is a “resident”.
- For example, a person qualifies as a lawful permanent resident of Germany and is liable to report the Indian NRO Fixed Deposits in German tax return. If he fails to do it, the information exchanged by tax authorities in India to the German tax authorities will unearth this info and can make the person liable to penalties and even prosecution as per German tax laws.
- Till December 2015, 98 jurisdictions have committed themselves to CRS, 56 and balance 39 will do so in 2017 and 2018 respectively.
Foreign Accounts Tax Compliance Act (FATCA)
Background
- USA enacted FATCA in March 2010. Purpose of this Act is to ‘detect, deter and discourage offshore tax evasion’ by U.S. citizens or residents.
- Since domestic laws of a sovereign nation like India could deter sharing of confidential information on offshore financial accounts, US government entered into an Inter-Governmental Agreement (IGA) with India on 9 July 2015.
- According to the IGA read with the FATCA provisions, foreign financial institutions (FFIs) in India are required to report tax information about US account holders to the Indian Government which will, in turn, relay that information to the US Internal Revenue Service (IRS). Furthermore, the US IRS will provide similar information about Indian citizens having any accounts or assets in the US.
- On 7 August 2015, the Indian Government enacted Rules 114F to 114h relating to FATCA reporting in India.
- In December 2015, the CBDT released a comprehensive Guidance Note on FATCA. The same was updated in May 2016.
Major provisions of FATCA
- All non-USA financial institutions are required to search their records for US persons and share details with IT department which in turn will share it with the IRS in the USA.
- IRS will cross tally the details of income and assets provided by you in tax returns vis a vis details received from Indian tax authorities and in case of gaps, can initiate penalty and prosecution proceedings as applicable under IRS rules.
- Imposes a 30 percent withholding tax on payments made to non-compliant financial institutions
Who qualify as reportable financial institutions under FATCA
Following institutions come under the purview of FATCA:
- It must be an entity (individuals do not qualify)
- The entity should be a “financial institution” (so someone like a “builder” will not qualify)
- The entity should be located in India (so any investments in outside India entities will not be covered)
- The financial institution should NOT be a non-reportable financial institution
Entities are classified into 4 categories:
- Custodial institutions (example: NSDL, CDSL, ICICI Securities etc.)
- Depository Institutions (e.g. Banks, NBFCs engaged in deposit taking activity, Credit Unions)
- Investment Entities (Mutual funds, PMS, NBFCs engaged in investment activity)
- Specified Insurance Companies (e.g. ICICI Pru Life, Kotak Life etc.)
Income Tax Rules w.r.t. India’s IGA on FATCA with USA & Multilateral Agreement on CRS
As discussed above, CBDT has issued Rule 114F to 114H in the Income Tax Rules for enabling institutions to comply with FATCA. The rules speak on the following aspects:
- Rule 114F: Definitions of the various terms referred to in the rules;
- Rule 114G: Information to be maintained and reported; and
- Rule 114H: Due diligence requirement.
Key actionables arising out of these rules for reporting FIs are as follows:
- Obtain registration with the Indian tax authorities vide online tax portal
- Submit information in Form 61B or NIL statement as the case may be
- Information for every calendar year to be reported to the Indian Tax Authorities by the subsequent May 31
- Nil statement to be filed even if no account is identified as reportable
- First reporting (for calendar year 2014) under FATCA is 10 September 2015 and for CRS, it is May 31, 2017.
Which accounts are exempt from reporting?
A non-reportable financial institution is exempt from reporting under FATCA. By that logic, any accout held in such accounts will not be reported. Examples are credit card issues, banks with a local only base or low value account only base, government institutions, ESIC, non public fund of armed forces, specified retirement funds
- Cash value insurance contract amounting to less than $50,000 for US reportable accounts
- Insurance contracts that do not have surrender value e.g. term life insurance, property insurance, motor insurance
- Annuity contracts
- Senior Citizen Savings Scheme (SCSS)
- Accounts held by estate
- Escrow accounts
(Note: This is not a complete list. Please refer to the actual text of the Income Tax Rules for more clarity)
Some important points from the Guidance Note is as follows:
- NPS trust will constitute as RFI and will have to report information of its policyholders.
- As for mutual fund units, either the depository (if held in demat form) or the AMC will report these to ITD.
Implications of FATCA/CRS on NRI
The biggest implication of FATCA and CRS is that people who have offshore assets (like a US based NRI having invested in India) will now find it very difficult to hide investments and corresponding income from eyes of governments of both countries.
For US persons and other NRIs, FATCA and CRS will be the frame of reference respectively. Following are the actions that one should take:
- Do self-certification in all your accounts. Comply with any FATCA/CRS request letters received from financial institutions. For example, all mutual fund houses require FATCA/CRS declaration is part of the normal KYC declaration from Jan 1, 2016 irrespective of tax residency.
- USA based NRIs should understand and comply with all IRS mandated reporting requirements. There are two key reportings: IRS FBAR Reporting by US NRI and Form 8938 Reporting by US NRI
- Re-check your past years’ tax returns to see if you’ve missed reporting any Indian income. If possible, revise the return.
Penalty for non-compliance
- For pre-existing accounts where self-certification is sought, the account can be de-activated and no further transaction is possible. For new accounts, account will not be opened pending this information
- Failure to disclose offshore income in tax returns in your country of tax residence and corresponding reporting requirements can invite severe concealment penalties which depends on that country’s tax law.
References and Additional Reading:
FATCA resource page on the IRS website
Copyright © CA Abhinav Gulechha. All Rights Reserved. No part of this article can be reproduced without prior written permission of the CA Abhinav Gulechha. The content of the article is for general information purposes only & does not constitute professional advice. For any feedback, please write to contact@abhinavgulechha.com