FATCA for Non Resident Indians

United States of America enacted the Foreign Account Tax Compliance Act or FATCA as it is commonly known. The main purpose behind this legislation is to ensure that the US citizens living anywhere in the world report their global sources of income and assets and pay taxes on that income in the US. The US residents were opening offshore bank accounts and legal entities and putting their moneys there thus avoiding paying tax.

FATCA works by sharing of information at the government level by entering into Inter-governmental Agreements with countries and so far around 174 governments have signed this agreement with the US. The financial institutions have to register themselves with the IRS. The U.S. imposes strict punitive measures on institutions that are not registered under FATCA. If a financial institution does not comply with FATCA, it will have to pay 30 percent penalty tax on all its U.S. revenues, including dividend, interest, fees and sales. Under the US laws, a taxpayer is a person who is a:-

•  Citizen of the US
• Resident in the US including persons who are holding green card
• Most US Visa holders including H-1 and L-1
• A person residing in the US
• Non-residents who own foreign financial accounts or other offshore assets.

The FATCA / IGA mandate that each entity irrespective of its legal status and jurisdiction (excluding US entities) should categorize itself as:

•  Foreign Financial Institution (FFI) or
• Non Foreign Financial Enterprise (NFFE), Active or Passive

The term Foreign Financial Institutions covers entities like custodial institutions (e.g. holds financial assets like custodian banks, depositories, brokers); depository institutions (holds deposits like banks); an investment entity (Brokers, mutual funds, investment manager / portfolio manager) and specified insurance company. The threshold value identified for reporting for accounts is account value exceeding USD 50,000 with few differences between pre-existing and new accounts w.r.t. cash value insurance. The FFIs must update the KYC for their existing account holders and undertake following reporting activities:

• Identify its accounts holders who have any connection with USA.
• At the time of opening any new account, to ensure whether the person opening the account has any US connections.
• In case of US connections, to collect certain specific information like name, address, U.S. TIN, account number, the account balance or value at the end of the relevant calendar year or immediately before the closure, of the account holder for the year 2014. For the year 2017 and subsequent reporting providing of U.S. TIN will be mandatory.
• For 2015 onwards additional information w.r.t. custodial account, the gross amount of interest, dividend, gross amount of other income generated. For depository account the gross amount of interest paid or credited to the account.
• For the year 2016 onwards additional information w.r.t. custodial account the total gross proceeds from the sale or redemption of property paid or credited to the account.
• At the end of each financial year i.e. as on December 31, find the value of the money / securities etc. maintained with the account.
• If the value maintained with the account is above certain threshold value (generally USD 50,000), report the above mentioned details of the account to the local tax authorities.

The information so collected has to be furnished to the local tax authorities and share it with US IRS within a defined time frame. The types of accounts whose information is to be reported are checking, saving, commercial, certificate of deposit, investment certificate, depository accounts, brokerage account, equity or partnership interest, debt interest, settlor or beneficiary of a trust, insurance contract, etc. It is immaterial whether the account is held directly or through agent, nominee, investment advisor, intermediary etc. Certain types of accounts like retirement and pension accounts, term life policy type of insurance are excluded from the definition of Financial Account. Brokers, investment advisors, portfolio managers are treated as non-reporting FI.

All Indian financial institutions (FI) will classify their account holders having US indicia and those without US indicia. Account holders with US indicia are likely to be contacted by the FI to seek their TIN and other information which is to be reported to the US IRS. Further, the FI will seek some declaration from the NRI account holders wherein the account holder agrees to the FI sharing the information with IRS.

An NRI holding a Non-Resident (Ordinary) bank account and earning interest on such savings and term deposit accounts pays tax deducted at source on the interest earned in India. Under the DTAA provisions, the credit for such tax paid in India can be claimed in the US income tax return. On the other hand, interest earned on NRE savings and NRE term deposits is not taxed by Indian Income tax authorities. The interest earned in this account / term deposit is something the NRI should disclose to IRS before the information flow takes place through exchange of information.

However, interest income earned on PF and PPF is not subject to income tax in India and will not be reported by the FIs as these two accounts are not classified as financial accounts. Interest income from other investments like Post Office Monthly Income Scheme, National Savings Certificate, Kisan Vikas Patra, corporate bonds, treasury securities etc. again will be subject to income tax in India as well as in US and should ideally be disclosed in the US income tax return. Investment made in equities and mutual funds and the capital gain realized on the sale of these investments will be subject to tax in India as well as in the US but tax credit will be available for the tax paid in India.

The income derived from immovable property held in India is taxable both in India and the US. First tax in India is to be paid as withholding tax by the tenant/buyer and this income is included in the US tax declaration. It is relevant to note that the account value will be provided to the US IRS as on the end of the calendar year where threshold value is more than USD 50,000.

While the individuals and corporate bear the impact of this new friendliness among countries and tightening of the snooze around their financial reporting, it is not easy for the financial institutions and the multi-national corporations, either. For the financial institutions, the updating of KYC of their existing clients is an uphill task requiring huge manpower and operational glitches. Their systems need to be updated and integrated, too, besides huge costs involved in training the employees. They have to ensure that they are fully compliant with FATCA to avoid massive penalties of 30% on their US revenue. More specifically, the FIs and MNCs have to ensure that:

• Their internal systems and teams are fully integrated, be it operations, legal, tax, risk, technology
• Conduct analysis of their legal structures to determine if they fall into one of the defined institutions under FATCA, and if so, registering as FFIs
• Cover up gaps to update their systems and processes
• Due diligence on their existing account holders
• Put up proper control measure to remain FATCA compliant

To sum it up, it’s awakening to a new dawn, one which brings in more pains than pleasures what with another regulation, Common Reporting Standards, slowly raising its head on the horizon.

For any further clarifications and assistance, I may be contacted at ruchira@thejurisociis.com (www.thejurisociis.com)
ruchira@preyorri.com (www.preyorri.com)

NRIs and FATCA- Do's and Dont's

Fatca has finally become a reality for NRIs resident in the US. The CAs, lawyers, law firms, media all writing and giving lot of information and articles on how it is going to impact the NRIs. Without going into the details of Fatca, it would be sufficient to list out the Dos and Don’ts for NRIs living in USA to help them in understanding the implications of FATCA.

Dos:

·         Disclosure of income earned in India to IRS as per the prevalent schemes in the US

·         Different types of incomes as stated in earlier posts here and here , will either continued to be taxable in both the countries or in one of them depending on the nature of the income.

·         NRIs having income in India should pay tax on it in India and file income tax return in India. At the same time, this income should be disclosed to the US IRS and tax paid on it in the US after taking credit for the tax paid in India.

·         To disclose the world-wide income to IRS.

·         Provide Form W 9 to Indian financial institutions with which any financial account is held. If the Form W 9 is not submitted your account will be closed by the FI.

Don’ts:

·         Do not sell any asset whether real estate or financial held in India.

·         There is no need to surrender either the Green Card or the US citizenship except those who do not want to pay their taxes in respective countries.

·         There is no point in closing the financial accounts now, since the first information flow deadline is already passed. Further, any financial account closed now will not help since the information as on the date of the account closure will be passed on to IRS.

·         The income earned in US is not to be disclosed to Indian tax authorities and is not taxable in India.

·         There is no change in the income tax regulations of USA nor the DTAA between India and USA. 

Please contact ruchira@preyorri.com for all your FATCA related querries. 

Non-Resident Indians (NRIs), FATCA and FBAR

Every non-resident Indian (NRI) resident in United States of America (US or USA) has an obligation to timely file true and accurate returns and forms to IRS. Any non-compliance may invite penalties or even criminal prosecution.

To give effect to FATCA, Indian financial institutions will either seek self-certification from the NRIs about their status. In case the NRIs have US indicia, the institutions will ask them to provide Form W - 9 which apart from other details have provision for disclosing US TIN. All these details will be reported by the financial institution to Indian tax authorities which will share it with IRS.

The financial institution will also, on an annual basis share the details about the value of the account maintained by NRI as on December 31. Thus, an NRI’s income in India will get reported to IRS by the Indian financial institutions. Since, US follows a world-wide income tax concept and the DTAA between India and US mostly provides for taxation of the income by both the countries, it becomes mandatory to disclose all such income in the income tax return filed with IRS. Of course, it is open to them to off-set the income tax liability in the US by the amount of income tax already paid in India.

American residents are already required to annually file Foreign Bank Accounts Report (FBAR) to the Department of Treasury. FBAR is to be filed when a US person has a financial interest in or signature authority over foreign financial accounts if the aggregate value of the foreign financial accounts exceeds USD 10,000 at any time during the calendar year.  The financial accounts to be reported are bank account, brokerage account, mutual fund, trust or other type of foreign financial account.

It can be seen that there is a self (FBAR) as well as third party (FATCA) reporting for foreign financial accounts. Though the definition of financial account is not the same between the two requirements but there is substantial over-lap. Other differences pertains to the minimum value threshold and the period for which the value shall be reported. At the same time, the two reports can be compared to seek information in case of any difference between the two.

For more details and to know if you are compliant, get in touch at ruchira@thejurisociis.com

Big Push to FDI Reforms in India

The Indian Government has come out with radical reforms to the Foreign Direct Investment (FDI) in order to give a boost to many schemes launched by Prime Minister Narendra Modi since his coming to power in 2014. These schemes are Make in India,Skill India, and in the pipeline are Startup India. Another reason for these changes in FDI reforms can also be linked to the poor show by the BJP in the recently held elections in Bihar. The detractors may term the timings of these reforms as to take away the attention of the people from the shameful defeat of Modi government in BJP and toward the much-needed economic reforms. The people of India have started to be disillusioned by the policies of the Modi government and the communal tensions and disharmony in the society off late, and the push in FDI is the much-needed distraction the Modi government needs at the moment.

The Government has announced opening of the following 15 sectors with either increasing the investment limits in the sectors or putting these sectors in automatic route rather than in the approval route. The following sectors have been opened up:- 

• Investment in private banking – Foreign Institutional Investors (FIIs)/Foreign Portfolio Investors (FPIs)/Qualified Foreign Investors (QFIs) can now invest upto 74%
• Cable TV networks – 100% FDI is allowed with upto 49% under automatic route
• DTH TV - 100% FDI is allowed with upto 49% under automatic route
• Plantations of coffee/rubber/cardamom/palm oil – 100% FDI under automatic route
• FM Radio – upto 49% under approval route
• News/current affairs TV Channels – upto 49% with government approval
• Non-news TV Channels – 100% FDI without prior approval, that is, under automatic route
• Duty-free shops – 100% FDI under automatic route
• Same Entity for single brand retailing/wholesale – 100% under automatic route
• LLPs – 100% under automatic route
• In the aviation sector, the sectoral cap of 49% without prior approval has been increased to 74% without prior approval for foreign general aviation charter operators and large ground handling companies to set up their own bases in India. The Government has also allowed 49% FDI in regional air transport services thereby giving a boost to its initiative to grow the regional air transport services in India.
• Investment in defence sector has also been eased from 26% earlier to 49% now.
• The construction sector has also been opened up by removing all restrictions on FDI except for a three-year lock in period in select projects.
• The companies owned and  managed by NRIs can now invest in Indian companies.
• Beside opening up the various sectors as above, the Foreign Investment Promotion Board (FIPB) has now been empowered to give single-window clearance to projects worth up to Rs. 50 billion or USD 753 million

There is no doubt that the government appears to be committed to push the economy and the industry has taken these reforms well and in a positive manner. It is to be seen how much these reforms convert into real economic growth.