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The Securities and Exchange Board of India (Sebi) is giving finishing touches to a draft intergovernmental agreement to be signed between India and the United States 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 that exceed certain thresholds must report those assets to the IRS (Internal Revenue Service), the US tax authority. It is expected to come into force in January 2014.
While the Reserve Bank of India was earlier asked to prepare the draft Intergovernmental Agreement (IGA), Sebi is now seeking feedback from the market participants on the key changes required to be made in the draft, according to officials familiar with the development. These suggestions will be forwarded to the Centre for incorporation in the IGA.
Since the issue is of “vital importance” and once implemented will have “impact on the securities market” Sebi has sought specific suggestions from the market participants on any changes needed in the text of the Model-1A of the IGA, any changes suggested in the due diligence procedures to be done by the reporting entity and any exempted entities and products that need to be incorporated in the IGA.
Sebi has also called for a meeting of key intermediaries next week to discuss and iron out issues.
FATCA requires foreign financial institutions such as banks, fund houses and brokers to report directly to the IRS information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest. For example, if a US taxpayer holds an account in an Indian bank, the Indian bank will be required to report this to the IRS once the intergovernmental agreement (IGA) is signed.
Ameet Patel, partner, SKP & Co, a Mumbai-based consultant said, “FATCA will affect anyone who has a relationship with US tax payers, particularly non-resident indians (NRIs). Awareness among intermediaries is less. But once the law is enforced, banks, mutual funds, 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 foreign financial institutions (FFIs) that do not agree to report certain information to the IRS about their US accounts or accounts of certain foreign entities with substantial US owners, according to the IRS website.
An FFI may agree to report certain information about its account holders by registering to be FATCA compliant. An FFI that has registered to be FATCA compliant and that has been 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. Enforcement is likely to begin from January 2014.
In February, Switzerland became one of eight countries that signed intergovernmental agreements which implement FATCA. Norway, UK, Mexico, Denmark, Ireland, Switzerland, and Spain are others who have pacts with the US under the law. Washington is said to be working with 50 countries to curtail offshore tax evasion and more countries are expected to fall in line soon.
UNCLE SAM wants to watch you
US enacted Foreign Accounts Tax Compliance Act (FATCA) in 2010
Washington signing inter-governmental agreements with several countries
Once pacts are inked foreign institutions will have to be FATCA-compliant
Institutions have to report financial information of US taxpayers
Institutions refusing to report will be liable for withholding tax on certain payments
