FACTA: Expect the unexpected (and the worst) in tax treatment and disclosure of offshore assets, particularly for Indian assets

On July 9, 2015, India and the US signed an agreement to implement the Foreign Account Tax Compliance Act (FATCA) that will facilitate exchange of information between the two countries starting on October 1, 2015.

FATCA was signed by Revenue Secretary Shaktikanta Das and US Ambassador Richard Verma in New Delhi. “FATCA is a mutual effort to combat tax evasion and it would be mutually beneficial for both the countries. FATCA would detect, discourage offshore tax evasion. This kind of exchange of information is top priority for governments”, Ambassador Verma said.

Under the inter-governmental agreement, Indian financial institutions would have to reveal information about US tax payers to the revenue department which would be passed on to the US tax authorities. Under the pact, US will also share with India financial information. The current reporting period beginning October 1 would be for July-December 2014. If a financial institution does not comply to FATCA, it will have to pay 30 per cent penalty tax on all its US revenues, including dividend, interest, fees and sales.

The US has signed IGAs with more than 110 jurisdictions and is engaged in related discussions with many other nations. America had enacted FATCA in 2010 to obtain information on accounts held by US taxpayers in other countries. It requires US financial institutions to withhold a portion of payments made to foreign financial institutions (FFIs) who do not agree to identify and report information on US account holders. As per the IGA, FFIs in India will be required to report tax information about US account holders directly to the Indian government which will, in turn, relay that information to the IRS.

Which Banks are Reporting?

Many Indian financial institutions have already registered on the IRS’s FATCA Registration Portal. The IRS has published a searchable list of financial institutions. The FFI List Search and Download Tool is located on the IRS’s FATCA website. The tool can be used to search for the name of a specific foreign financial institution and find out if it has registered under FATCA. As of today, over 714 financial institutions in India have registered with the IRS. Users can also download an entire list of financial institutions with the tool. See the FFI List Search and Download Tool and User Guide. Countries complying with FATCA can be found at FATCA – Archive.

Who is Reported?

Financial institutions in India will carry out a detailed due diligence on all their clients and report details of their U.S. clients to the Internal Revenue Service. U.S. persons for tax purposes are generally considered as:

• A citizen of the U.S. (including an individual born in the U.S. but resident in another country, who has not renounced U.S. citizenship);
•  A lawful resident of the U.S. (including any U.S. green card holder);
• Most U.S. visa holders (including H-1 and L-1 visa holders);
• A person residing in the U.S.
• Somebody who has spent considerable period of time in the U.S.
• American corporations, estates and trusts may also be considered U.S. persons

Which Accounts?

Indian financial institutions need to report certain accounts to the IRS under FATCA. The need for identifying U.S. person(s) arises from the fact that money invested in India needs to be reported to IRS in the U.S. While the threshold limit for reporting will be specified by the regulators in India based on FATCA regulations, institutions will have reporting requirements under FATCA, in terms of threshold limits. Most NRI, NRE, and NRO accounts will be reported.

While the IRS has recently targeted Swiss, Israeli and Indian banks, India continues to be a focal point for the U.S. government. While new criminal prosecutions start and continue, our law firm expects unabated aggressive enforcement of the U.S. tax laws, including increased criminal prosecutions and civil investigations. I have been advising our clients to expect the unexpected (and the worst) in their tax treatment and disclosure of offshore assets, particularly for Indian assets.