FATCA & CRS

“FATCA” or Foreign Account Tax Compliance Act is a United States (US) law aimed at prevention of tax evasion by US citizens and residents (“US Persons”) through use of offshore accounts. FATCA obligates foreign financial institutions (FFIs), including Indian financial institutions to provide the US Internal Revenue Service (IRS) with information on the accounts of to report accounts held by specified US Persons. Since domestic laws of sovereign countries, including India, may not permit sharing of confidential client information by FFIs directly with US IRS, the U.S. has entered into Inter-Governmental Agreement (IGA) with various countries.

The IGA between India and USA was signed on 9th July, 2015, which provides that the Indian FIs will provide the necessary information to Indian tax authorities, which will then be transmitted to USA automatically. The IGA between India and USA has become operational effective August 31, 2015. The text of the IGA signed between India and USA is available at : Download PDF

The impact of FATCA is relevant not only at the point of ‘on-boarding’ of investors, but also throughout the life cycle of the investor account or folio. Any event which impacts customer tax status or change of key information may trigger impact under FATCA. Further, FATCA due diligence is to be directed at each investor (including joint investor). Once a given investor is identified as a reportable person/ specified US person, all his folios will have to be reported – including those where he may be a joint holder. Notably, in case of folios with joint investors, the entire account value of the investment portfolio will be attributable under each such reportable person.

On similar lines as FATCA, the Organization of Economic Development (OECD), along with the G20 countries, of which India is a member, has released a “Standard for Automatic Exchange of Financial Account Information in Tax Matters”, in order to combat the problem of offshore tax evasion and avoidance and stashing of unaccounted money abroad, requiring cooperation amongst tax authorities. The G20 and OECD countries have together developed a Common Reporting Standard (CRS) on Automatic Exchange of Information (AEOI). The CRS on AEOI was presented to G20 Leaders in Brisbane on 16th November, 2014. On June 3, 2015, India has joined the Multilateral Competent Authority Agreement (MCAA) on AEOI.

The CRS on AEOI requires the financial institutions of the “source” jurisdiction to collect and report information to their tax authorities about account holders “resident” in other countries, such information having to be transmitted “automatically’ annually. The information to be exchanged relates not only to individuals, but also to shell companies and trusts having beneficial ownership or interest in the “resident” countries.

In view of India’s commitment to implement the CRS on AEOI and also the IGA with USA, and with a view to provide information to other countries, necessary legislative changes have been made through Finance (No. 2) Act, 2014, by amending section 285BA of the Income-tax Act, 1961. Income-tax Rules, 1962 were amended vide Notification No. 62 of 2015 dated 7th August, 2015 by inserting Rules 114F to 114H and Form 61B to provide a legal basis for the Reporting Financial Institutions (RFIs) for maintaining and reporting information about the Reportable Accounts. A copy of the Notification No. 62 of 2015 modifying the Income-tax Rules, 1962, is available at : Download PDF

SEBI has issued a circular CIR/MIRSD/2/2015 dated 26th August 2015 instructing Mutual Funds to implement FATCA and CRS as per abovementioned notification. In short, all financial institutions viz. Banks, Insurance companies, mutual funds, etc. are required to comply with the FATCA & CRS rules prescribed by the government.

FATCA obligates every Indian financial institutions/mutual funds to provide required tax related information to Indian Tax authorities of accounts held by specified US Persons. Therefore when you open a new account with mutual fund you need to provide information regarding your tax status. In case you are not a tax resident of any other country outside India, you will have to submit a declaration confirming the same.

As per agreement signed under FATCA and CRS, all financial institutions are required to provide the necessary information to Indian tax authorities, who will in turn transmit the same to the respective jurisdiction.

The responsibility to collect the additional information required for compliance with FATCA & CRS, as mandated by the CBDT / Govt. of India, currently vests upon each financial institution i.e. each mutual fund, as a part of account opening information. Till such time as the regulatory guidelines are revised, each mutual fund has to mandatorily collect the FATCA/CRS related information from each customer, as per the existing regulatory guidelines.

Yes, every customer who opens a new account with any mutual fund is required to give FATCA/CRS self-certification. For your convenience both these have been merged into one and you need to provide one set of information which will suffice for FATCA as well as CRS. If a self-certification is not provided by an account holder or the reasonableness of a self-certification cannot be confirmed, the account is treated as reportable to the Indian tax authorities, who in turn are obligated to pass on the information to the tax authorities in the respective US/G20/OECD countries.

For all Pre-exiting accounts, your mutual fund would assess your information with them and may have contacted you already or will contact you to seek relevant information/declaration. You can continue to invest into existing account/folio. However, if you receive an intimation from any mutual fund seeking FATCA/CRS declaration you need to submit the same in order to avoid being reported to the Indian income tax authorities / tax authorities of applicable foreign jurisdiction.

Yes. Since you would be opening a fresh/new folio, both of you need to mandatorily submit a FATCA declaration individually.

FATCA is a purely a reporting mechanism. FATCA does not restrict or ease the acceptance of investments from US Persons. Each Mutual Fund will continue to independently assess their offerings for US Persons basis their internal policies.