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FATCA: The last-minute rush

In the interim, the RBI and Sebi advised banks and other financial intermediaries to keep the registration with IRS on hold until further announcements.

Pranay Bhatia and Kriyang Karia         Last Updated: November 4, 2014  | 12:01 IST
Pranay Bhatia, Partner, BDO India LLP
Pranay Bhatia, Partner, BDO India LLP

It was anticipated that with Prime Minister Narendra Modi's visit to the US, uncertainty over FATCA implementation would come to an end.  However, the Indian government is yet to make any announcements on the FATCA implementation after giving an in-principle approval to FATCA Inter Governmental Agreement (IGA) -Model -1, few months back.

FATCA is a US federal law that requires United States persons, including individuals who live outside the US, to report their financial accounts held outside of the US, and requires financial institutions across the world to report to the IRS about their US clients. The local government supports and becomes a signatory to FATCA (by signing an IGA with the US), making FATCA a local law in the signatory country. The IGA approach was developed to address issues faced under direct reporting regime. The impacted financial institutions will have to register with the Internal Revenue Service (IRS) and Global Intermediary Identification Number (GIIN) is issued to the registering institutions.  

Kriyang Karia, senior manager at BDO India LLP
Given that India has adopted Model-I IGA, Indian financial institutions had to obtain GIIN before end of this year as against July 1, 2014. After initially analyzing the impact of FATCA, Indian financial institutions are waiting for further guidance for implementation. It appears that FATCA implementation may coincide with the tax compliance season adding weight on financial institutions' bunch of existing compliance.

What is stopping finalization of IGA may only be speculated. It is either India's willingness to time it with OECD's automatic exchange mandate or it is US' reluctance to grant reciprocation of information. It is learnt that the mutual fund industry had called for negotiating, with the Indian government, specific exemption for mutual funds from FATCA reporting.  Even the broking community had called for similar exemption.  As a fall out of FATCA and other US regulations, the Indian mutual funds have stopped accepting fresh investments from US investors.  

In the interim, the RBI and Sebi advised banks and other financial intermediaries to keep the registration with IRS on hold until further announcements. However, the RBI and SEBI had to make exceptions for financial institutions having branches in countries that have either agreed to Model-II IGA or where final FATCA regulations apply. The time line to obtain registration for branches in these countries was before July 1, 2014 with the Indian entity being the registering entity. In view of this exception, some banks and intermediaries would already have the GIIN in place. The others are waiting for further clarifications.

A little over two months are left to register with the IRS and obtain GIIN.  However, in the current state of things, Indian financial institutions, to ensure implementation and compliance, will need to grapple with many changes at the last moment. To name a few, on-boarding documentation, changes in the IT system to absorb further details and produce required reports, in-house trainings.

Indian financial fnstitutions would also expect the government to roll out the guidance notes to the complicated FATCA regime. The guidance notes can be expected in lines with the UK Guidance, which too was recently updated. A more simplified version with references to and formats of the relevant forms for declarations and reporting would definitely be appreciated.

However, from the Indian government's perspective, FATCA is only one of the various compliance mandates it is dealing with. At the Convention on Mutual Administrative Assistance in Tax Matters (the Convention), a multilateral agreement was developed by the Organisation for Economic Co-operation and Development (OECD). The agreement mandates the consenting jurisdiction to exchange information for tax matters on an automatic basis, to other consenting jurisdictions. India was the first non-OECD country to ratify this Convention in February 2012. In February 2014, the OECD released the Standard for Automatic Exchange of Financial Account Information in Tax Matters as endorsed by the G20 Finance Ministers and approved by the OECD council. More than 65 countries and jurisdictions have committed to implementation of the OECD standard.  More than 40 countries, including India, have committed to a specific and ambitious timeline of first automatic information exchange in 2017, which includes both, OECD and non-OECD countries. More jurisdictions are expected to commit to implement the OECD standard. This mandate is also popularly known as GATCA. The Indian government will have to work around building systems and processes to fulfill both, FATCA and GATCA, mandated exchange of information.

It is certain that FATCA will be a reality, soon. Financial institutions will have to eventually register with IRS and obtain GIIN. To register, the financial institutions will have to determine their FATCA status viz. Financial or non-financial entity, reporting or non-reporting financial entity, exempt or non-exempt entity. In addition to FATCA, financial institutions will have to gear up for GATCA and future proof their efforts in a bid to comply with information exchange mandates.

All eyes are now on the FATCA announcement. One could only hope that the guidance notes are rolled out sooner for a hassle free transition to the cost heavy compliance mandate. However, it will be interesting how the financial industry deals with non-US, foreign investors, after the introduction of GATCA.

This article is contributed by Pranay Bhatia, Partner, and Kriyang Karia, Sr. Manager, BDO India LLP
(Disclaimer: Data provided is intended for information only. The views and opinions of the author/s expressed herein are solely their own.)

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