The three-year-old US law seeks to improve tax compliance involving foreign financial assets and offshore accounts.
Imagine this: Having moved to the US on a work visa, you have become a taxpayer there. But you have not closed your savings account with State Bank of India and a demat account with its subsidiary.
Both you and your bank/broker would soon be required to report this to the Internal Revenue Service (IRS), the US tax authority. The Securities and Exchange Board of India (Sebi) is giving finishing touches to a draft inter-governmental agreement (IGA), to be signed between India and the US under the Foreign Account Tax Compliance Act (FATCA).
The three-year-old US law seeks to improve tax compliance involving foreign financial assets and offshore accounts. Under FATCA, US taxpayers with specified foreign financial assets exceeding certain thresholds must report those to IRS.
FATCA also requires foreign financial institutions (FFIs), such as banks, fund houses and brokers, to report directly to IRS information about financial accounts held by US taxpayers, or foreign entities in which US taxpayers hold a substantial ownership interest. These provisions will become applicable to Indian financial institutions once the Indian government signs IGA with Washington under the Act.
The law is expected to come into force in January 2014.
While the Reserve Bank of India (RBI) was earlier asked to prepare the draft IGA, Sebi has now sought feedback from market participants on the key changes required to be made in the draft. These suggestions will be forwarded to the Centre for incorporation in IGA.
Since the issue is of “vital importance” and, once implemented, will have “impact on the securities market”, Sebi has sought specific suggestions from market participants on changes needed in the “text of the Model-1A of IGA”, those suggested in the due diligence procedures for a reporting entity and any exempted entity and product that needs to be incorporated in IGA.
Sebi has also called for a meeting of key intermediaries next week to discuss and iron out issues.
Ameet Patel, partner, SKP & Co, a Mumbai-based consultant, said: “FATCA will affect anyone who has a relationship with US taxpayers, particularly non-resident indians. There is little awareness among intermediaries. But, once the law is enforced, banks, mutual funds and portfolio management services will have to first register themselves with IRS and then start reporting the numbers periodically.”
Under FATCA, withholding agents must withhold tax on certain payments to FFIs that do not agree to report certain information to IRS about their US accounts or accounts of certain foreign entities with substantial US owners.
An FFI may agree to report certain information about its account holders by registering to be FATCA-compliant. An FFI registered to be FATCA-compliant and issued a global intermediary identification number (GIIN) will appear on a published FFI list. Withholding agents may rely on an FFI’s claim of FATCA status based on checking the payee’s GIIN against the published FFI list. This list is scheduled to be published monthly, beginning December 2013.