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Is India Ready For FATCA?

Published on Fri, Jul 10,2015 | 23:24, Updated at Mon, Jul 13 at 22:26Source : CNBC-TV18 |   Watch Video :

This week, India and the US signed an inter-governmental agreement to implement FATCA. Enacted by the US in 2010, the Foreign Account Tax Compliance Act, targets tax non-compliance by US taxpayers with foreign accounts. It requires US taxpayers to report certain foreign financial accounts and offshore assets. More importantly, it also requires foreign financial institutions, say Indian banks, insurance companies, mutual funds to report financial accounts held by us taxpayers or foreign entities in which US taxpayers hold a substantial ownership interest. Non compliance by foreign financial institutions could result in the US withholding up to 30% of certain payments. The just signed inter-governmental agreement simplifies the burden on Indian financial institutions and spares them the withholding tax. But now that it’s been signed, a series of deadlines become applicable raising the question - Is India ready for FATCA? To answer that, CNBC TV18’s Menaka Doshi is joined by S Ranganathan, CFO, Edelweiss and Basant Shroff, Partner – Advisory Services, EY.

Targets tax non-compliance by U.S. taxpayers with foreign accounts
•    U.S. taxpayers to report certain foreign financial accounts & offshore assets
•    Foreign Financial Institutions to report financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest

Doshi: Quickly first, the reporting requirements for foreign financial institutions, say, an Indian bank, an Indian mutual fund or even Edwelweiss.

Shroff: From a reporting requirements perspective, if I look at the Foreign Account Tax Compliance Act (FATCA) documentation, it requires certain amount of reports to be out there by September 30, 2015, for the financial year ended December 31, 2014.



FFIs in Model 1* IGA jurisdictions
Reporting Deadline: September 30
 *India IGA is a Model 1 IGA

Doshi: So, what information are they looking for?

Shroff: They are looking for information for people who are US persons and the income that they are generating out of India, from Indian financial institutions. For example, if somebody is repatriating funds in India, not reporting the income out of that to the US authorities and so on and so forth.  That is the primary reporting requirement that will become applicable

Reporting Requirements
U.S. citizens, U.S. individual residents, and a very limited number of non-resident individuals who own certain foreign financial accounts or other offshore assets must report those assets

Doshi: For Indian financial institutions or foreign financial institutions from the FATCA point of view?

Shroff: Correct.

Doshi: And just to clarify, this Spetember 30 deadline that you keep referring to, this is the deadline that is put in, in the FATCA timelines by the US. This is the date by which all foreign financial institutions (FFI) in model one Intergovernmental agreement (IGA) jurisdictions, that is the kind of IGA India has signed. So, all FFIs in India will have to submit the information to the Indian government who will in turn have to submit it to the US government by September 30.

Shroff: Absolutely. So, that is the FATCA timelines overall. Now, if India in the course of action of signing the IGA would have agreed any other modalities either in terms of a deferred date or some kind of a exclusion for the current September 30, it is something that is still not know clearly in public.

Doshi: How are you dealing with this? You have to collect information from your pre-existing clients to find out whether they are US persons or not. You have to collect information from the new clients that you sign up and you have to report all of this to the Indian government. How much information do you need? How easy is it to get? And by when do you have to report it to the Indian government?

Non-US Person
Will have to provide additional information if any of these conditions fulfilled
US citizenship/residence
US place of birth
US address including US PO boxes
US telephone number
Repeated payment of amounts to US address/account
Current Power of Attorney/signatory authority granted to person with US address
‘Care of’ or ‘Hold mail’ address which is sole address for account holder

Ranganathan: Is it required to be done? Yes, Edelweiss or for that matter any of the financial institutions would get covered which primarily deal with the depository or a custodian or a bank or an insurance company would get squarely covered by this and there is a reporting requirement, as Basant was talking about, September 30 is the date when we are required when the Indian government has agreed to exchange this information with the US Internal Revenue Service (IRS). But, I guess, when you look back at the draft rules, which we talked about on 114F and 114H, the reporting days were sort of July 31, if I recall, of this year.

Doshi: Which meant that financial institutions had to provide the information to the Indian government by July 31 and in turn will provide it to the US government or IRS by September 30.

Ranganathan: Which also means that we are just 15-20 days away from that deadline.

Doshi: But, those were draft rules. They were never really made into final rules.

Ranganathan: Even the version five that we are talking about which was laid down in public. They have not been made final even today. So, I guess July 31 may not be the due date for the FFI. Coming back to know your customer (KYC) documentation, yes, is it going to be a tough thing? Yes, at least to begin with because the kind of information and the data that we are required to capture for any kind of individual is something like 34 points that we are required to submit, for non-individuals it is about 30. And quite a few of them are mandatory fields that we need to capture and the…

Doshi: But, I saw that FATCA only requires you to obtain information from those people who are US persons. And US persons is sort of very tightly defined; a citizen or a resident of the US, a partnership corporation estate, etc. incorporated in the US and non-US incorporated entity but having a 10 percent shareholding.

Definition of ‘US Person’
-          A citizen or resident of the USA (including green card holder)
-          A US incorporated entity
-          A non US incorporated entity having 10% shareholding/substantial ownership by  US citizen/resident/person with US mailing address…
Ranganathan: These are the definitions which are prescribed and they are very crisply worded for once, this piece of legislation is really very good in fact. But, then what you will have to also look at is you will have to collect this data from each of the customers to make sure that whether they qualify or not.

Doshi: As a US person?

Rangnathan: As a US person because you will need to collect this information and then…

Doshi: So, you will have to ask every customer of yours just like HDFC bank will have to ask every customers of its. LIC will have to ask every insurance customer of its and SBI will have to ask every depositor or a loan taker of its for this information. Are you a US person or not?

Ranganathan: Absolutely.

Doshi: Is that the only question you ask?

Ranganathan: No, what you do is you ask a couple of questions. You may not ask all the seven questions. What you do is in a KYC document, you ask couple of questions or three questions, you make it very simple for the customers in India. Ask them four or five questions and what happens is if the answer to that is affirmative, then you start second round of KYC documentation which will ask for all these 34 information or maybe much more than that, what is required to be submitted to Central Board of Direct Taxation (CBDT). So, that is how you go about it.

Shroff: Just to add to that, the way the rules are drafted is there would be a different requirement for pre-existing customers because all of the entities that we are talking about or the FFIs, the Indian FFIs, they have an existing customer base. So, they will have to do a retrospective effect of KYC. But in order to make the process easier, what the FATCA guidelines have suggested is you do electronic search for individuals where the balances are upto USD 50,000.

Doshi: So, if I was to just try and convert that into an illustration, let us take State bank of India for that matter. A large amount or large number of fixed depositors may be people who do not have USD 50,000 of deposits in their accounts. They would not need to fill out any form, SBI does not need to reach out to them for any additional KYC, that is what you are indicating, right?

Shroff: Correct.

Doshi: The same would apply to you?

Ranganathan: Absolutely right. The heart of FATCA is due diligence. When I read those rules, the heart of FATCA seems to be due diligence. You need to make sure that you have done your best in terms of capturing of data in term of the library that you have created for yourself and the onward submission of this data that you have collected to the revenue authorities.

Doshi: But, that will be a very small percentage of customers that will have a deposit of USD 50,000 and more, right?

Ranganathan: Absolutely. When I report the number of customers, the number of clients would be very limited in number which is what my guess is.

Doshi: So, do you have to do KYC only with those who have, let us say, a deposit of USD 50,000 and more?

Ranganathan: No, I will need to do the entire database. I will have to scan through my entire database, either electronically or if it is a large volume, as Basant was talking about, if it is a high value, high volume thing, I will need to do a paper search also to make sure that I have looked at the entire database of mine to capture the right kind of people, the right kind of reportable entities and then report that. Eventually what will go out to the CBDT will be a very small number when compared to the database that I have.

Shroff: Let me just add to what Mr Ranganathan said here. So, what we are talking about is two sets of KYC requirements. One set is for new customers who will on board as on an effective date which is still not clear because we are just waiting for the guidelines to come out.

Doshi: And the timelines, as you pointed out.

Shroff: And the timelines to come out. So, after that effective date, every customer will have to go through a new set of KYC requirements which will require the FFIs to ask pertinent questions around US persons. Now, in order to deal with the customers who are pre-existing, as of the cut-off date whichever is decided, they have created buckets. So, if a customer is upto USD 50,000 bank account balance, you do not need to do anything. Between USD 50,000 account balance to USD one million, you are doing a electronic search and then making sure that any information that you already have in your systems which indicate they are US persons , then you need to do an additional requirement, ask them the questions.

Doshi: Ask them the questions and maybe put those 30 questions to them.

Shroff: Absolutely. For accounts which have got USD one million and above, their full due diligence will be required. You will have to ask irrespective of whether you have that information or not.

Doshi: Luckily most of us will fall into the first bucket so the compliance work at the end of the FFI is maybe not as daunting as it seems at first, right?

Shroff: Exactly. Having said that there are specific nuances depending on which industry do you belong to. So for example if I look at insurance companies, what do I ascribe as the cash value of an account, so there are those definitions and again if I look at where…

Doshi: Whatever you do, it is not going to amount to USD 50,000 and that is a fairly large amount in this day and age, right?

Ranganathan: Individuals may not get covered but I doubt if entity, corporates and all might get covered.

Doshi: Since Edelweiss is amongst the few financial groups in the country that has already started work on this, probably two years ago as you have pointed out, have you been able to identify what percentage of your client base actually falls in the second bucket, which is they have the equivalent of USD 50,000 and more and therefore you need to at least ask them the question, are you a US person and if they say, yes or they are ambivalent then you need to ask them additional 30 questions.

Ranganathan: We have a sizeable amount of broking clients with us. Now the question is whether the broking clients will get covered or not. The reason for that is these broking clients who might have some other bankers or custodians, now the custodian will also report these and we will be just an execution broker. So to that extent whether we will get covered or not is a question.

Doshi: How easy is it to get the information from your customers?

Ranganathan: It may not be very easy. This is going to be a challenge but what I have found in all kinds of Indian regulations is as we go along, people do grapple with these issues and the challenges. We overcome the challenges and the quality of compliance does improve or goes up with every passing reporting date. Having said that, yes it is the consequent of stringent and it will be very sad to see you close an account just because the know-your-client (KYC) documents are not in place.

Doshi: I am glad you spoke of the outcomes of this or the repercussions of this because that is what I wanted to get to. If your customer does not share the information with you or lies, says I am not a US person but is a US person, whose liability is it? The customers, the foreign financial institutions or is it the Indian government because this is not an agreement with the FFI and the US or the IRS but it is an agreement between the Indian government and the US government?

Benefits of India-US IGA
Reporting and other compliance burdens on Indian financial institutions may be simplified
Indian financial institutions will not be subject to withholding under FATCA

Shroff: The first responsibility accountability would be the customer and with the FFIs or Indian FI to prove that they asked the question and they got the answer in negative. That if they cannot demonstrate that they asked the question and the customer provided misleading information then that is where the grey zone starts as to who will be accountable.

So as a result documentation of what you have asked, how you collected the information and how you have recorded and kept it will become extremely important when you are doing your KYC.

Doshi: What are the consequences if you are an individual who has been found to be lying or if you are a foreign financial investor (FFI) who has been found not be to doing enough due-diligence? If you read through the FATCA fine print on the IRS website, essentially the main threat is 30 percent withholding of certain payments. But, this is an intergovernmental agreement, this is not the IRS dealing with Edelweiss or ICICI Bank or HDFC Bank directly, so what would the consequence be?

Shroff: So, in the Indian context, given that we have signed the model one IGA, the consequence at the account holder could be that they might be barred in certain foreign financial institutions on one side. On the other side, their accounts would be reported to the US IRS. And the US IRS, given that they might have a US person status or a US tax residency status, depending on what the facts of the case could be, then accordingly they would be a kind of trialed under the US tax regulations and things like that.

Ranganathan: Do you expect any regulations around the Indian government penalising the assessee, in that sense, just because he has not done enough or whatever he has done is irregular?

Shroff: That is an interesting question, but if I look at the draft guidance that you referred to, majority, most of my read does not give me a sense that the CBDT or any other Indian competent authority would go down to the account holder level yet.

Ranganathan: Because, what happens is it will get and pass on information to IRS, the information that it receives from the FFIs, if that is sort of corrupted and it is incorrect, then what it passes on is a data which is incorrect. So, therefore has a responsibility, the CBDT has a responsibility to make sure that it is authentic information that they get.

Doshi: So, if I was to itemise the challenge list for financial institutions. Firstly, you need clarity on the reporting timelines. So, you need the Indian government to tell you, “Edelweiss, this is the date by which I need the information on all your customers.”

Ranganathan: And what information…

Doshi: So, then you need the formats. And the third important thing that you need is for the CBDT to clarify if there are any consequences under Indian law, if you are not found to be compliant with FATCA. Have I understood that correctly? These are the top three challenges?

Ranganathan: Absolutely.

Doshi: How concerned are you that we have an intergovernmental agreement that got signed this week? We have potentially a September 30 deadline. We are in the middle of July and we as yet do not have any of these things which is the timelines, the final formats and clarity on the legal consequences.

Shroff: If I look at from an Indian FFI perspective, they are very concerned at this point in time. They are waiting anxiously saying what the final guidelines would say, particularly from a timeline standpoint, because that becomes extremely critical.


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