Ever since the Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 by the US Congress to target non-compliance by taxpayers using foreign accounts, the hallucination effect has come into force. Banks and financial intuitions are related with US treasury accounts in some way or the other just like banks in India have USD Nostro accounts in the US.
There is no choice except signing the Inter-Governmental Agreement for sharing of information with the US, or else it could have a negative impact on the economy. Under the pact, exchange of information between countries will be subject to a confidentiality clause. Indian institutions are required to report the financial accounts held by US taxpayers or Indian entities in which US taxpayers hold a substantial ownership interest.
FATCA requires enhanced onboarding process for all clients including custody products. In addition, the detailed identity of such beneficial owners is also required. Efforts must be co-owned by disciplines across the organisation; the whole exercise requires a Herculean effort to cull out information for existing accounts.
On the one hand, many banks are struggling to achieve the target of Unique Customer Identification Code and on the other, FATCA requires to aggregate balances for reporting purposes.
Moreover, it requires sensitisation of front office staff specially dealing with NRI/PIO accounts. They need to obtain know your customer details such as passports, country of citizenship/residence, tax identification numbers, full address, standing instruction to transfer funds in US and so on, in all accounts of foreign nationals, business entities and other legal entities opened on or after July 1, 2014, at the time of account opening.
In addition, it requires modification of account opening forms to provide for such information. All these efforts require a huge push by the management of larger financial institutions.
The Central Revenue Service is drafting a reporting format and planning to insert a new section in the Income Tax Act, whereby reporting entities are required to furnish, by May 31 every calendar year, the requisite data to the government which, after compilation, will forward it to the respective governments.
There is an additional burden on banks to ensure that any customer overpayment in excess of an amount equivalent to $50,000 is refunded within 60 days. This is so if excess of a credit card balance or other revolving credit facility and the overpayment is not immediately returned to the customer.
The authority is planning to follow the Prevention of Money Laundering Act model whereby the designated director will be made accountable for compliance with the regulations. The responsibility of the designated director will increase manifold under the new regulatory regime.
Indian entities that enter into an agreement with the IRS to report on their account holders may be required to withhold 30% on certain payments to foreign payees in case the payees do not comply with FATCA. Reporting and withholding require a huge budgetary allocation as banks and financial institutions have to make a modification in their core banking system.
As on date there is no discrimination, but with the new act coming into force, the financial institution may have to start discriminating with policies or practices against opening or maintaining financial accounts for individuals who are specified US persons and residents of India.
Foreign Account Tax Compliance Act of the US has made a paradigm shift in the collection of data across the world. In effect it is an enhancement of the anti-money laundering due diligence, which can be applied by the government of each country effectively by singing the Inter-Governmental Agreement.
It goes without saying that reporting entities incur an additional burden in terms of employee cost and time. Many financial institutions will need to gear up for the first reporting deadline of July 31, 2015.