Reporting Under FATCA/ CRS and implication of non-compliance

Foreign Account Tax Compliance Act (FATCA) is a US Law that requires foreign financial institutions to identify and report on the assets held by US account holders through enhanced due diligence reviews and report them periodically to the U.S. The report is in line with local FATCA regulations, based on citizenship. The purpose of FATCA is to prevent tax evasion by U.S. persons from using banks and other financial institutions outside the USA to park their wealth outside the U.S. and consequently avoid U.S. taxation on income generated from such wealth. FATCA-CRS obliges financial institutions to report information about U.S. persons having accounts with them.

 FATCA legislation will affect both individual and non-individual customers who are treated as ‘U.S. persons’ for U.S. tax purposes. The FATCA legislation will also affect certain types of entities with beneficial owners/ controlling persons from the U.S. An account having U.S. indicia like U.S. place of birth, U.S. address, etc. does not necessarily mean that the account would be reported. Concerning CRS, the coverage would extend to account holders/ beneficial owners or controlling persons of entities, being tax residents of any of the signatory countries.

An IGA (Inter-Governmental Agreement) is a bilateral agreement between a country’s government and the U.S. government that facilitates compliance with FATCA. The model agreements enable FIs in the designated jurisdictions to comply with FATCA, especially where privacy laws exist. The Government of India and the United States of America (U.S.) signed the FATCA Inter-Governmental Agreement (IGA) on 9 July 2015. Accordingly, Indian Financial Institutions will be required to perform enhanced KYC procedures to identify accounts of US and other foreign taxpayers, as defined, and report on such accounts on an annual basis. Banks have to report at the end of the year (December 31) the balances of reportable bank account holders to the tax authorities.

Under the IGA, foreign financial institutions (FFIs) in India are obligated to report tax-related information about their US account holders to the Indian Government. This information is then shared with the US Internal Revenue Service (IRS) to ensure that US taxpayers are compliant with their tax obligations. Likewise, the US IRS will provide similar information about Indian citizens who hold financial accounts or assets in the United States. This mutual exchange of tax-related data commenced on September 30, 2015. In line with the IGA, the Indian Government introduced rules on August 7, 2015, specifically related to FATCA reporting in India. These rules set out the guidelines and procedures that financial institutions must follow to fulfill their FATCA reporting obligations.

The Common Reporting Standard (CRS) is a new information-gathering and reporting requirement for financial institutions in participating countries/jurisdictions, to help fight against tax evasion and protect the integrity of tax systems. Similar to FATCA, the purpose of CRS is to aid the automatic exchange of information between bilateral treaty partner countries about accountholders/investors maintaining accounts in foreign jurisdictions to avoid tax evasion on the funds parked in such countries. The CRS requires financial institutions including banks, insurers, and asset management businesses to identify the tax residency of all their customers and in most cases report information on customers who are tax residents outside of the country/jurisdiction where they hold their accounts. CRS is a different regulation with different requirements and therefore these entities still need to provide additional information for the CRS even if they have provided information under FATCA.

India is committed to the cause of automatic sharing of information. India has also signed the CRS agreement and the FATCA IGA for exchange of information. Amendments have been carried out in the Income-tax Act, 1961, and Income tax Rules have been notified, to enable enhanced reporting on the part of financial institutions. Financial Institutions will have to report the required information as per FATCA and CRS regulations and as per the notified Income tax rules, on all accounts (new and pre-existing) identified as ‘reportable’. The FIs shall have to performs enhance due diligence to comply with such reporting obligations. In addition, a Financial Institutions may also need to report information about customers who do not provide the required information. Indian FIs are required to report the information to the Indian Income Tax Department which would then transmit the financial information to the Tax authorities of the relevant countries.

 Legal Consequences:

FATCA regulations apply to U.S. taxpayers, including U.S. citizens, green card holders, tax residents, foreign financial institutions, and non-financial foreign entities. NRIs with a tax obligation to the U.S., either through citizenship or investment, must comply by disclosing their foreign assets and financial accounts.

Non-compliance with FATCA can result in significant penalties for NRIs, including fines and the possibility of criminal charges. Financial institutions may also withhold a portion of the payments made to non-compliant accounts. NRIs face the risk of losing access to their financial accounts if they fail to provide the required information.

In addition to financial penalties, companies and individuals involved in non-compliant activities may face legal consequences, including prosecution and imprisonment. This can severely damage the company’s reputation and result in personal liabilities for executives.

Failure to comply with FATCA can lead to a 30% withholding tax on certain U.S. source payments made to the non-compliant institution. As per the Union budget 2023, a penalty of Rs 5,000 would be levied for furnishing inaccurate statements of financial transactions owing to false or inaccurate self-certifications submitted by the Account Holder under FATCA/CRS. Also, it has been proposed that the said penalty has to be recovered by the reporting entity from the Account Holder. To avoid hefty penalties and ensure compliance, FFIs must develop robust systems for identifying U.S. account holders, conducting due diligence, and reporting to the IRS. Staying updated with changing regulations and guidance is crucial to meeting FATCA requirements effectively.

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