COMPLIANCES GALORE - FOR INDIAN LISTED COMPANIES

In the name of protection of investors, here is another salvo from the Ministry of Corporate Affairs (MCA). With effect from September 7, 2016, an Investor Education and Protection Fund Authority has been constituted under the Investor Education and Protection Fund Authority Rules, 2016. The Authority will have the responsibility to maintain the Fund and do other related acts. And the companies, on their part, have to follow the Rules with respect to unclaimed and unpaid shares in respect of the dividends which have remained unclaimed for the past seven years continuously. It’s as simple as that.

Or is it? Simple, I mean. Of course not. When the regulator is stepping in, things and business cannot remain simple. There are plethora of rules to comply with, deadlines to be met, statements and returns to be filed, investors to be chased and if you dare to blink and miss, you get penalized.

Well, coming back to the Investor Education and Protection Fund (IEPF) which has been proposed, but yet to be set up under the Companies Act, 2013 wherein the companies would transfer all unclaimed/unpaid shares and dividends for distribution to innocent investors who lose their money by investing in illegal or unlawful funds. The Government would also deposit all disgorged amounts to the IEPF. Interestingly, the Authority has been constituted but the Fund itself is yet to be set up.

The companies have to traverse a detail path in order to transfer the unclaimed/unpaid shares and dividends under the IEPF Rules. First, the companies have to identify such shares with respect to unclaimed dividends, within a period of 90 days after holding its AGM, and every year thereafter, for a period of seven years. Once these amounts are identified, it has to prepare a statement and upload it on its own website and on the website of the IEPF through the prescribed forms for this purpose. The Company Secretary of the company has been assigned this task.

At the completion of seven years, the company has to notify each investor whose dividend has remained unclaimed for seven years. Mind you, the company cannot transfer the funds to the IEPF unless the shareholder has been notified and informed 90 days in advance from the date of transfer. The detailed step-wise procedure for such notification to the shareholder has been provided in Rule 6 of the IEPF Rules, 2016. Let us see what the steps entail:-

1.       Shareholder has to be informed at the current available address;

2.       A notice has to be published in the newspapers in English and regional language having a wide circulation;

3.       Publish information of all such share and their beneficiaries on the company’s own website.

After all this, if the shares and dividends still remain unclaimed, the companies have to transfer the amounts to the IEPF. Any non-compliance with the Rules and the procedures attracts a penalty of minimum five lakh of rupees going upto a maximum of 2 lakh rupees and the officer responsible for the compliance shall be penalized separately up to a maximum of five lakh rupees.

The most interesting aspect of these Rules is that if the concerned shareholder decides to suddenly become aware, after a period of seven years, of his rights as a shareholder and the fruits he was supposed to reap from the investments he had forgotten he had made, he can claim them from the IEPF Authority by simply filling up a form and paying some fee. And the company shall, after verifying his credentials, be obligated to disburse the shares and the dividends earned on those shares.

It is agreed that the poor gullible innocent investors need to be protected from the bad wolves, that is, the companies. At the same time, the investors also need to be educated and careful of their belongings and possessions. The companies bear so much cost in terms of employing resources to maintain and record all the information and seven years is a long time. In my personal opinion, after seven years all unclaimed shares and dividends ought to be forfeited and all claims ought to be rejected, except under most special and genuine circumstances.

Not surprisingly, as a corporate lawyer, I caution my clients to ponder and think at least a dozen times before they are serious about incorporating a company and not less than a hundred times before they would like to see their company listed on one of the national stock exchanges. Because it’s easier to incorporate a company, somewhat arduous to list, but without a doubt, almost impossible to remain fully compliant year after year.

An afterthought - shouldn’t the government also move its hawk-eye to vanishing and fly-by-night companies? What about the money lost by investors in IPOs raised by such companies who just disappear after collecting huge amounts?

Ciao!!!

Ruchira Gupta

India-Mauritius Double Tax Avoidance Treaty Amended

“The protocol for amendment of the convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius was signed by both countries on May 10 at Port Louis, Mauritius,” the Finance Ministry of the Government of India said in a statement.

This is a much needed amendment to the India-Mauritius Double Tax Avoidance Agreement (“the Treaty”). This bilateral agreement earlier provided that the capital gains tax on sale of securities in India can be taxed only in Mauritius. The laws of Mauritius, on the other hand, provided zero tax under certain conditions. Hence, the Mauritius route to Indian capital markets was the most preferred and profitable route for foreign investors.

The statement further said, “The protocol will tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius.”

Under the new protocol, capital gains arising from sale of shares of Indian resident companies acquired after April 1, 2017 will be taxed in India. This will apply to Singapore based companies also.

A transition window has been provided to the companies before the rules kick in. The following is the broad framework:-

·       Presently, under the Treaty, India does not tax capital gains on sale or transfer of shares of Indian-resident companies by Mauritius-resident companies.

·       From April 1, 2017 to 31^st March, 2019, companies based in Mauritius and Singapore will pay capital gains tax @50% of the domestic tax rate. For example, if the current rate is 15%, the companies shall pay only 7.5%.

·       After April 1, 2019, the companies will have to pay full tax.

·       The benefit of tax at half the domestic tax rate will be given under special conditions of passing the main purpose test and bonafide business test.

·       In case the expenditure of a company resident in Mauritius is less than Rs. 2,700,000 in the immediately preceding 12 months, it will be considered as a shell company.

·       Not only capital gains tax, there is a witholding tax of 7.5% on interest income arising in India in respect of claims and loans to the banks resident in Mauritius. This will be triggered from April 1, 2017.

Increased cooperation between India and Mauritius is envisioned with respect to exchange of information and collection of taxes, among other things.

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