India, US agree to implement Foreign Accounts Tax Compliance Act

30 Jun 2014 Evaluate

In order to help the US to tackle tax evasion, India has agreed to implement US law Foreign Accounts Tax Compliance Act (FATCA) to combat possible tax evasion by Americans through Indian financial entities. Accordingly, the Reserve Bank of India (RBI) has asked banks and financial institutions to register with US authorities by December 31, 2014 and obtain a Global Intermediary Identification Number (GIIN) to report accounts and assets held by US citizens. However, the Inter-Governmental Agreement (IGA) on FATCA, which came into effect on April 11, will be signed only after Cabinet's approval.

The RBI’s statement noted that Indian financial institutions with overseas branches should register for GIIN only when the formal IGA is signed after cabinet's approval. Further, financial entities in a jurisdiction without an IGA, which are allowed to register as foreign financial institutions (FFI) should get registered with the US authorities before July 1, 2014 to avoid potential withholding under FATCA. Overseas branches in a jurisdiction that does not have IGA and does not allow an FFI agreement may not register and they would eventually be subject to withholding under FATCA. If registration of the parent bank or head office is a pre-requisite for a branch to register, such banks should register as per the given time frame.

The FATCA act is aimed to check and impose withholding tax on illicit activities of some wealthy individuals who use offshore accounts to avoid millions of dollars in taxes. According to FATCA act, the US government to sign IGAs with various countries where American individuals and companies may hold accounts and other assets. The noncompliance with FATCA requires the investor to pay 30 percent withholding tax on certain US source payments. The US Treasury introduced two formats of the IGA - Model 1 and Model 2. India has agreed to Model 1-Inter governmental Agreement (IGA) under FATCA under which financial entities will be required to report information on US account holders to the US internal revenue service (IRS) through CBDT. As per the Model 2, financial institutions are required to report information directly to the US IRS rather than their local jurisdictions.

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India, US agree to implement Foreign Accounts Tax Compliance Act

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