FATCA LAW OF USA
FATCA LAW OF USA
Introduction:
On 9th July 2015, India has signed the inter-governmental agreement (IGA) on Foreign Account Tax Compliance Act (FATCA) with the USA. The government would now receive information about Indian “tax resident” persons having financial accounts in the USA. Financial institutions (FIs) have to perform required due diligence processes, identify “reportable persons” from their customers and counter parties and report information pertaining to such persons on an annual basis to the respective local government so as to enable exchange of information. In fact, for FATCA to be official in India, the Indian government is required to inform the US about completion of the internal procedures. The date of such notification would become the “effective date” of FATCA implementation.
Coverage:
FI’s are defined to effectively cover those that hold the client or investor’s financial account in the form of deposit of money or investments. As such, banks, deposit taking NBFC’s, depository participants, custodians, brokers, insurance companies and all funds are also covered, unless any specific exemptions may be available under the Inter-governmental Agreement. Some of the exemptions available include exemptions for government bodies and government owned entities, retirement and savings fund (such as provident funds) subject to conditions, small banks, local banks, fund managers as well as brokers, subject to meeting given tests for each category.
For FATCA purposes, the definition of “tax resident” specifically covers US citizens and green card holders. The coverage of reportable persons goes beyond individual customers. It extends to “non-participating FIs” and the controlling persons of “passive entities”. To enable identification, FI’s will have to obtain “self declaration” regarding their FATCA status and classification from relevant customers and counterparties. While onus of providing a correct self declaration rests on the customer/ counterpart, the FI should exercise due diligence in evaluating the same for consistency with other information or documentation.
Procedural Aspects:
Towards FATCA compliance, FI’s will need to reach out to relevant customer accounts that existed as at 30th June 2014 (known as pre-existing accounts) as well those opened from 1st July 2014 (known as new accounts). Depending upon the size of the account, the account may be out of scope (where aggregate balance with the FI is up to $50,000) or requiring a detailed enquiry of paper records as well as information with the relationship manager (where the aggregate balance is above $1,000,000). Having identified accounts, the FI may, in relevant cases, rely on any declaration and/or documentary evidence from the customer establishing his non-US status and not report such a customer. New accounts opened from 1st July 2014 are required to provide “self certification” on FATCA status and classification. While the FI can rely on such “self certification”, it is expected to exercise required due diligence in evaluating the same for completeness and consistency with other information or documentation pertaining to the customer.
The reporting period for FATCA is the calendar year, though as an exception, the first period of coverage is the six-month period from 1st July 2014. The deadline for inter-governmental exchange of information is 30th September following the reporting period. As such, the Indian government is obligated to share data for the year 2014 (first half period) with the US government by 30th September 2015. The buzz amongst FIs is that the rules and the reporting format would be notified very shortly and FIs may be required to submit their data for 2014 by July/ August 2015 on a best efforts basis. This will be huge challenge for the FI as well as the government. One can also perhaps cannot think of the customer’s reaction on receiving a lot of mails from various FIs, all asking for FATCA self certification in a time bound manner.
Conclusion:
FATCA requires detailed change management processes covering the complete customer life cycle (account opening, account maintenance as well as closure) and several functions such as compliance, product design, customer on-boarding and front end, operations as well as IT. The road to the implementation of FATCA in the short term, especially meeting the immediate reporting deadline, is certainly not a smooth one. All parties, especially FIs, need to quickly understand how FATCA impacts them and work out their action plan for FATCA. In the long run, matter should have to be settled down with the hope that all governments, including India, will greatly benefit from improved tax compliance.
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