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FATCA & CRS – Birth of twins.
Birth Of FATCA
The Foreign Account Tax Compliance Act, 2010 (FATCA) is a United States federal law whose intent is to enforce the requirement for United States persons (including those living outside the U.S.) to file yearly reports on their non-U.S. financial accounts to the Financial Crimes Enforcement Network (FINCEN). The law requires all non-U.S. (foreign) financial institutions (FFI’s) to search their records indicating U.S. person-status and to report the assets and identities of such persons to the U.S. Department of the Treasury. The FATCA is the revenue-raising portion of the 2010 domestic jobs stimulus bill, the Hiring Incentives to Restore Employment (HIRE) Act.
The intention of FATCA is to Detect, Deter and Discourage Offshore Tax Evasion by US Citizen or Residents.
Evolution Of CRS
The Common Reporting Standard (CRS) is an information standard for the automatic exchange of information (AEOI). The legal basis for exchange of data is the Convention on Mutual Administrative Assistance in Tax Matters and the idea is based on the USA Foreign Account Tax Compliance Act (FATCA) implementation agreements.
The intention of CRS is to achieve transparency of tax information exchange on a global basis.
Implementation of FATCA & CRS in India
On 9th July, 2015, the Indian government signed the Model 1 IGA with the US Government (for FATCA) which requires the Indian FIs to provide necessary information to the Indian tax authorities, who in turn will transmit the underlying data to the US Government on a regular basis and vice versa. CRS implementation was slightly ahead of the FATCA IGA signing wherein India joined the Multilateral Competent Authority Agreement on 3rd June, 2015.
Operating Framework in India
Broad Classification Of Stakeholders for FATCA/CRS Purposes
Impact on Customers
While FFIs are majorly impacted to create a compliance system, the customers of these FFIs are also impacted as the FATCA & CRS reporting regime mandates each of these customers to provide their KYC information on a periodical basis. Further, any non-compliance/non-furnishing of information by the customer could result in closure of the account and short listing of the account as a “non-cooperative account”. From a practical standpoint, these disclosure requirements would make documentation more robust for the FFIs but very cumbersome for an end customer.
Post implementation of FATCA & CRS in India, Indian FIs have been gearing up their systems to cater to the reporting requirements. However, in the first phase of implementation, many practical challenges had been identified which have been listed below:
Documentation requirement for pre-existing and new accounts and complicated timelines;
Lack of clarity in subject has triggered mass disposal of investments in India by US based non-resident Indians and has affected investment flow into India.
Post the first phase of the reporting period, the second phase of reporting is due on 31 May 2016 for FATCA and the time line for completion of due diligence for pre-existing accounts under CRS is due for completion by 30 June 2016.
Impact to American Residents and Citizens with Foreign Assets:
Ensure compliance with the 8938 reporting to the IRS, specially taking care of changes like marriage, divorce, inheritance, acquisition of a company, partnerships etc.
Ensure compliance with the FBAR filing each year as per the IRS law
Account for any notices in India or in the USA and make corrections if needed
If there has been any non-compliance with FATCA rules in the past, file for voluntary disclosure under OVDP or streamlined, depending on your situation. Consult tax or legal professional to discuss your options for voluntary disclosure.
The law is simple to follow by adhering to a few rules and ensuring that you have all required documentation to backup any inquiries by the IRS when needed.
Note: All references to FFI were omitted intentionally as non-essential to customers and readers of this article.
Author: Radha Aggarwal from Taxes By Radha
Radha is a CA from India and CPA in the USA, with a total of over 20 years of experience in auditing, international accounts consolidation, personal taxes and international taxation issues.