Monthly Archives - May 2015

Foreign Account Tax Compliance Act (FATCA) – The Act, and How it Impacts Your Institution – Interview of Samir Jayaswal, SVP & Head of Operations, Prism Cybersoft

Foreign Account Tax Compliance Act (FATCA) – The Act, and How it Impacts Your Institution – Interview of Samir Jayaswal, SVP & Head of Operations, Prism Cybersoft


A lot is being discussed about FATCA these days? What is it?

FATCA stands for Foreign Account Tax Compliance Act, enacted by United States in March 2010. The objective of this act is to detect and discourage tax evasion by US persons. Its aim is to ensure that persons from the US with financial assets outside the US pay US tax.

What triggered a compliance act like this?

US government believed that it is losing about USD 10 billion in taxes because its citizens are not paying taxes on assets and incomes they are maintaining outside of United States.

What does FATCA require?

Under FATCA, Foreign Financial Institutions (FFIs) have to report to the US Internal Revenue Service (IRS) about the accounts and assets of all their American clients, and also about the entities in which they hold a substantial interest of ownership.

Who is it applicable to?

It is applicable to all the US taxpayers and Foreign Financial Institutions (FFIs). FFIs have an option of entering into an agreement directly with IRS or through an Inter-Governmental Agreement (IGA) signed by their home countries.

Why is it important for Indian Institutions?

It is important for Indian Institutions because for US government, these institutions come under the category of Foreign Financial Institutions. It is therefore mandatory for these institutions to declare assets and earnings of their clients who are US citizens.

What is the difference between Model 1 and Model 2 under FATCA?

Model 1 deals with the tax authority of the partner country. If a country opts Model 1 then it has to sign an Inter-Governmental Agreement (IGA) with IRS under which all the FFIs of that country will furnish all the information to the tax authority of their home country and then the information will be provided to IRS by that tax authority. Model 1 is again sub-classified further – Model 1A, a reciprocal version, under which the United States will provide the information of the partner country’s taxpayers to the partner country and Model 1B which is a non reciprocal version.

On the other hand, in Model 2, FFIs deals with IRS and provide information to IRS directly. There is no involvement of any government authority from their home country. India, like most countries has signed Model 1A. Few countries like Switzerland, Hong Kong and Japan have signed Model 2 and left their individual banks and financial institutions to deal with IRS directly.

Who is a US person for FATCA compliance?

  • A US person is a citizen or resident of the United states, or
  • A partnership, a concern or a corporate entity which is incorporated under the US laws, or

A non U.S. incorporated entity which has the shareholding or ownership of 10% or more by a person who was born in the U.S. or is a U.S. resident or citizen or a U.S. incorporated entity.

Is there any impact on someone who is not a US citizen?

No. FATCA doesn’t apply to non US citizens and they will not be impacted.

What type of Institutions come under Foreign Financial Institutions?

Foreign Financial Institutions include,

  • Banks & Depositories
  • Depository Participants
  • Investment Entities such as Private Equity Funds
  • Insurance Companies
  • Custodial Institutions & collective funds such as Mutual Funds

Some Foreign Financial Institutions are exempted like

  • Certain local and small financial institutions
  • Certain retirement entities
  • Most of the non-profit organizations
  • Most governmental entities.

What do Indian Institutions need to do to comply with FATCA?

Indian Government is under an Inter-Governmental Agreement (IGA) with the executive branch of the US. Under this, the Indian government agrees that all the financial institutions will comply with the rules of FATCA and they will report the necessary details needed by IRS to Indian tax authority which in turn will pass it on to the IRS. They need to register themselves with IRS and obtain a Global Intermediary Identification Number (GIIN).

FFIs then need to disclose the names, TINs, addresses, account numbers, balances, U.S. identification numbers and the transactions of the accounts which are under the name of American customers.

Who is normally responsible in any company for FATCA compliance?

Overall the boards of directors are responsible who may delegate the task of monitoring and reporting to the Chief Finance Officer or Chief Risk Officer to cull out data and report to the tax authorities.

What are the consequences for non-compliance?

If a financial institution doesn’t comply with the rules and regulations of FATCA, then it will incur a penalty of 30% withholding tax on all its US revenues including interest, sales, dividend and fees.

The reporting and other burdens regarding compliance get simplified if their country signs an IGA with the US just like India has signed.

Is FATCA applicable to only personal accounts or business accounts as well?

FATCA is applicable to both personal as well as business accounts with US customers for US tax purposes.

What happens if one of the owners in a joint account is US person?

If one of the joint account holders is US person then that account will be treated as US account and its details will be provided to IRS.

Do all the accounts will come under scrutiny by the FFIs?

No. Accounts under the value of $50,000 will not be scrutinized unless the total value touches more than $75, OOO at any time during the tax year.

How does IGA arrangement favor FFIs?

If a country has signed an IGA with IRS, then it simplifies the burden of compliance for FFIs. They just have to provide information to the tax authority of their home country and don’t need to deal with the IRS in US. The tax authorities in the local country perform a data quality check of the information provided by the financial institutions (FIs) and then submit the consolidated information to IRS. It removes the domestic legal compliances of information sharing, which lightens the burden of financial institutions because all the information will be shared through the government channel only.

How can a FFI register itself under FATCA?

An FFI has two options – either by registering itself online or by filling a paper form which then has to be mailed to IRS. A financial institution should only register one branch per country in FATCA registration form. Once a FFI gets registered, it gets a Global Intermediary Identification Number (GIIN) issued to it by the IRS. If that FI enters more than one branch with the same country name then all the branches with the same country name are assigned the same GIIN.

What is GIIN?

GIIN is Global Intermediary Identification Number which is given to every FFI by IRS when its registration is approved. It is a 19 character identification string that is a combination of different identifiers including the FATCA ID, FI type, category code and country identifier.

How is data shared by participating institutions to the tax authorities of its country and in turn to IRS?

The data is exchanged using International Data Exchange Services (IDES) System. IDES is a secure web application which allows FFIs and tax authorities of partner countries to transmit FATCA data in a standard XML schema format directly to IRS.

How is FATCA affecting US citizens who are living outside of the U.S.? How is it impacting institutions?

There is no choice for US citizens but to comply with this law. However, a lot of US citizens who are living outside of US are thinking to renounce their US citizenship because it is tough for them to comply with the complicated rules and regulations of FATCA.

Some institutions in India are also skeptical of opening Non Resident Indian’s accounts. They fear penalties if the individual representing as a NRI actually turns out to be a US citizen. There is some amount of hesitation.

Why are countries accepting to comply with FATCA?

Most countries felt that the requirement is one sided. Some also felt that penalties are too steep. Along with a penalty of 30% withholding tax, there is also a fear of exclusion from the U.S. markets, which is compelling foreign countries to comply with FATCA. Few countries showed resistance but later complied. One such example is Russia which faced being elbowed out of U.S. markets resulted in finally signing of the law by its President Vladimir Putin. India too had its own reservations initially. The issue of reciprocity and complying only with a US specific law was questioned. It was felt that exchange of information should happen through a Common Reporting Standard amongst G-20 nations.

What an FFI can do if a customer is not providing the required information?

Foreign Financial Institution must then withhold a 30% tax if the recipient is not providing the information which is required by the FFI.

What role does technology play in complying with FATCA?

FATCA compliance is highly dependent on right technology. Technology is needed to extract trading, financial and stock holding, ownership – direct and indirect data from all investment, trading and holding data. In absence of technology, this information cannot be correctly compiled and reported to tax authorities.

FATCA seems to have raised a lot of controversy since its introduction. What are the key points due to which it is facing opposition?

Most opposition is coming because financial institutions already feel burdened with compliance. Though FATCA will bring transparency, it also attracts a lot of opposition. Some key ones are –

  • Cost – Increased cost for FFIs and foreign governments to compile and transmit information to IRS
  • Citizenship Renunciation – To avoid the complication of complying with FATCA, US citizens living abroad are renouncing their citizenship
  • Discrimination – FIs have started discriminating between US and Non-US persons to avoid their problem of getting information from them. Even in India there is reluctance to open accounts of US citizens
  • Complexity – Rules and regulations are fairly complicated to comply with. Large institutions will need more people and sophisticated technology to comply with such requirements
  • Security – As transmitting of information is involved, so a country’s security is at risk. However, IDES is a fairly secured transmission platformAlthough FATCA agreement has been signed on a reciprocal information sharing basis, some critics point out that US is under no legal obligation to share information with signing countries. How this compliance pans out will be interesting to see.