Complying with the US foreign account tax act

May 29 2014, 23:08 IST
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SummaryWhile the foreign financial institutions cannot be expected to ensure that their customers are tax compliant, with the onerous responsibilities under the FATCA and more such legislation waiting in the wings, they face challenging times ahead

In April this year, India entered into an inter-governmental agreement (IGA) with the US government for the implementation of the Foreign Account Tax Compliance Act (FATCA), 2010, of the US.

The FATCA will come into force from July 1, 2014, and requires foreign financial institutions (FFIs) such as banks, mutual funds, hedge funds, insurance companies, etc, to register with the Internal Revenue Services (IRS) of the US and furnish certain information regarding accounts held by US persons that are worth more than $50,000. The penalty for non-compliance by FFIs entails a withholding tax of 30% on their US-sourced income/receipts.

But what does this mean for Indian financial institutions (FIs)?

India has consented to Model-1A IGA in terms of which the Indian FIs shall be able to report information on their US account holders through the Central Board of Direct Taxes (CBDT) instead of reporting directly to the IRS.

Indian FIs shall no longer be required to enter into an agreement with the IRS and will automatically attain deemed compliant status. However, Indian FIs will have to register online at the IRS’s registration portal. The registration deadline for FIs having branches in countries which do not have an IGA with the US under Model-1 is June 3, so as to be on the list of IRS-compliant entities by July 1, 2014. FIs not having such branches can register before December 22, 2014, so as to be on the list of IRS-compliant entities by January 1, 2015.

The entering into the IGA by India is a welcome move for Indian FIs since the compliance will be much easier than it would have been in the absence of an IGA.


Compliance with the FATCA is proving to be a challenge for FFIs and the Indian experience is not expected to be different. In the Indian context, the following challenges are expected:

* Indian KYC norms may not contain the US status indicia (indications) which are the fundamental basis for determination of US status. The US status indicia for individuals and institutions are listed in the accompanying table. Satisfaction of any of this criteria is not in itself determinative of whether or not the account is owned by a “US person”, it only means that the Indian FI will need to scrutinise the account further to establish whether or not the account is owned by a “US person”.

* Indian FIs may need to change their internal processes to ensure that they

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