1.

Background to FATCA
 The Hiring Incentives to Restore Employment (HIRE) Act was signed into law by
President Barack Obama in 2010 to incentivize businesses to hire unemployed workers so
as to reduce the high unemployment rate that was brought about by the 2008 financial
crisis.
 One of the incentives offered to employers through the HIRE Act include an increase in
business tax credit for each new employee hired and retained for at least 52 weeks

2. Introduction:

FATCA stands for the Foreign Account Tax Compliance Act.

• FATCA is a United States (“US”) legislation that primarily aims to prevent tax evasion by US
taxpayers by using non-US financial institutions and offshore investment instruments.

 CRS, developed by the Organization for Economic Cooperation and Development (OECD),
is a global reporting standard for the automatic exchange of information (AEoI). The goal of
CRS is to allow tax authorities to obtain a clearer understanding of financial assets held
abroad by their residents, for tax purposes.

More than 96 countries have agreed to share information on residents' assets and incomes in
conformation with reporting standards.

3. Three major differences between FATCA and CRS

1. FATCA requires a financial institution to find U.S. persons; however, with more than 90
countries currently committed, CRS requires a much broader scope.
2. Under CRS, the definition of a “reporting financial institution” is different. So, even if your
organization is not required to report on financial accounts under FATCA, it may be under
CRS.
3. There is currently no de minimis limit under CRS. FATCA, by contrast, only kicks in for
individual accounts with balances exceeding $50,000 – companies have different limits.
These add up to significant differences in scale. For example, the volume of U.S. persons
reported under FATCA rarely exceeds the low thousands; whereas a major UK bank has
estimated that 7% of its customers (several million accounts) will be reportable under CRS

4. How does FATCA work

FATCA provisions require all U.S. taxpayers to report yearly all assets held outside of the
country. By taxing these foreign-held assets, the U.S. increases its revenue stream, which is put
towards its incentive account for job stimulation.

Non-U.S. Foreign Financial Institutions (FFI) and Non-Financial Foreign Entities (NFFE) are
also required to comply to this law by disclosing the identities of U.S. citizens and the value of
their assets held in their banks to the Internal Revenue Service (IRS) or the FATCA
Intergovernmental Agreement (IGA).

FFIs and NFFEs that agree to the law must annually report the name, address, and tax
identification number (TIN) of each account holder that meets the criteria of a US citizen; the
account number; the account balance; and any deposits and withdrawals on the account for the
year.

5. Penalty for Non-compliance:

 U.S. residents who do not report their foreign account holdings and assets that exceed
$50,000 in value in any given year.
 FFIs that do not comply with the IRS will not only be excluded from the U.S. market, but
will also have 30% of the amount of any withholdable payment deducted and withheld
from them as a tax penalty.

Withholdable payments in this instance refer to income generated from US financial assets held by
these banks and include interests, dividends, remunerations, wages and salaries, compensations,
periodic profits, etc.

6. FATCA in India

After signing FATCA agreement with USA and Multilateral Competent Authority Agreement
(MCAA) developed by the Organization for Economic Co-operation and Development (OECD)
and G20 countries by Indian Government, CBDT (Central Board of Direct Taxes) issued a
notification requiring financial institutions to provide certain financial information of accounts
owned by NRIs

7. Information required for FATCA/CRS declaration:

The form, style, design, requirements may be different in FATCA/CRS declarations of
different financial institutions/intermediaries. However, the common required
information includes:

Name and Permanent Account Number (PAN)

Type of address in KYC

Place (city/state) of birth, Country of birth and Nationality

Gross Annual Income or Net worth

Occupation

Whether Politically Exposed Person (PEP) or related to PEP

Whether resident of another country

Country of Residence, Tax ID number and type. The declaration specifically asks to include
USA as country of residence if you are a US citizen or a green card holder, even if you have
moved to India and are Indian resident.

The declaration specifically states that it has been issued to comply with the CBDT notified rules
114F-114H and that the relevant information will be reported to tax authorities / appointed
agencies or to any institutions for ensuring withholding from the account or any proceeds, i.e.
deducting TDS on income or sale amount. Any change in the information is also required to be
intimated to the respective financial institute/intermediary within 30 days.

Unfortunately, the FATCA/CRS declaration is not common (like KYC – Know Your
Client/Customer) or uniform among all financial institutions and investors are required to make
the declaration separately for respective institution.

E.g. Even if you have invested in mutual funds but in different funds (e.g. Reliance, HDFC,
Franklin), you will need to complete 3 FATCA/CRS declarations as the intermediaries
(registrars) for all these mutual funds are different (Karvy, CAMS and Franklin respectively).

7. Implications of FATCA on various industries:

 FATCA impact on banking industry

Although the scope of the proposed FATCA regulations casts a relatively broad net over the
types of entities and businesses that are defined as financial institutions, foreign entities that
conduct banking or similar business (“foreign banks”) are squarely in the center of the net.

 FATCA impact on insurance industry

The draft FATCA regulations released on 8 February 2012 incorporate some of the changes and
exclusions that the insurance industry has been lobbying to include. However, it is apparent the
exclusions and reliefs do not go as far as many were hoping.

 FATCA impact on funds industry

Any entity which makes a payment of US source income must consider whether it is subject to
FATCA. FATCA may apply to both financial and non-financial operating companies..

As an FFI, the fund must enter into an agreement with the IRS in order to become a Participating
FFI (PFFI).

 FATCA impact on private equity and hedge funds industry

The new rules will have a significant impact on all private equity and hedge funds which
generate US source income because they will likely be considered either a US Withholding
Agent or a Foreign Financial Institutions (“FFIs”) under these rules.

 FATCA impact on real estate industry

For the real estate industry, the new FATCA rules will impose additional challenges for both US
and non-US real estate funds because of the many complicated and diverse investment structures
that have become common in recent years.

 FATCA impact on Professionals of the Financial Sector (PSF)

Professionals of the Financial Sector (PSF) include investment professionals, such as investment
advisers, brokers in financial instruments, wealth managers, professionals acting for their own
account, registrar agents, etc…

These entities will need to determine their FATCA status based upon their actual activities.

Nevertheless, even those entities that would not qualify as FFI may be confronted with FATCA
provisions, as it is likely that clients of such PFS may require assistance as to the application of
FATCA.

PSF should thus determine their status for FATCA as to their own activities, but regardless the
outcome, should reflect on the services to be offered to their own clients, e.g., providing
assistance on the fields of:

 Classification and identification provisions;

 Reporting preparation; and

 Withholding preparation.

8. Challenges and complexities involved in the implementation of FATCA

1. Although the price to pay for not complying with FATCA is high, compliance costs are
also high.TD Bank, Barclays and Credit Suisse reportedly spent millions of dollars in
 fighting this law given that they faced compliance costs of about $100 million. Large
banks like HSBC, Commerzbank, and Deutsche, following the enactment of the law,
either limited the services offered to Americans or completely stopped serving U.S.
investors in an effort to mitigate the high compliance cost.
2. It is complex to understand the law relating to residential status in India and foreign
county.In India, residential status under Foreign Exchange Management Act (FEMA) and
Income Tax Act (ITA) are different and it is possible that a person may be a non-resident
under FEMA and a resident under ITA. In foreign country, it is important to understand
the difference between residential status for immigration and for income tax purposes.
3. Requirement of PAN for investments and taxation: ALL financial transactions – opening
bank account, applying for loan or credit card, buying property, buying mutual fund,
paying tax, etc. require PAN. All major transactions are also being reported to the Income
Tax Department (ITD) on an annual basis. It is almost impossible to do any official
transaction without PAN or without notice of the ITD.
4. Filing tax returns in India: From Financial Year 2014-15, Passport number is required
while filing income tax return. In addition, a detailed schedule of foreign assets and
related income is also required to be reported. Furthermore, the ITD now requires
separate line item for payment to NRI for rent, interest, salary, etc.
5. Unique Customer Identification Code (UCIC): RBI has mandated that a unique customer
ID is to be allotted to one person (based on PAN) for all accounts with banks, i.e. one ID
for checking, savings, Demat, Trading, mutual fund, etc. accounts.
6. As per the Black Money Act, any unreported asset or income of an Indian resident (even
in foreign country) would be considered as Black Money and will be subjected to heavy
tax and penalties, including prosecution.

9. Overcoming challenges

Financial institutions must expand their tax operations capabilities to meet increasing regulatory
demands.

Financial institutions need a market-leading compliance tool that will analyze and monitor local
tax laws, compile data from a myriad of sources, produce and validate tax information reports
and transmit those reports to the proper tax authorities.
Thomson Reuters ONESOURCE drives global tax compliance and accounting decision-making
with the industry’s most powerful portfolio of corporate technology applications.

ONESOURCE is there for every step of the organization’s tax journey is designed to simplify
the tax compliance process and remove the burden of formulating and implementing new
compliance policies; meeting each need of each stakeholder in their tax department with
innovative, expert-backed applications.