EY Tax Alert. Executive summary

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1 24 August 2015 EY Tax Alert Central Board of Direct Taxes notifies Income-tax (11 th Amendment) Rules, 2015 for furnishing statement of reportable accounts as per section 285BA of the Income-tax Act, 1961 Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your Ernst & Young advisor Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 by the Government of the United States of America (USA) (Govt. of US) with a view to combat tax evasion by U.S. citizens and residents through the use of offshore accounts. FATCA requires financial institutions globally to share information about the financial accounts held by U.S. citizens/ residents for tax purposes to the Internal Revenue Services (IRS) of the Govt. of US. On similar lines as FATCA, Organization for Economic Co-operation and Development (OECD) issued a standard for Automatic Exchange of Information (AEOI) in tax matters called as Common Reporting Standard (CRS). CRS requires financial institutions globally to share information about the financial accounts held by the non-residents (other than U.S. citizens and residents for tax purpose). To enable financial institutions in India to comply with FATCA and CRS, the Government of India (GOI) signed the Inter-Governmental Agreement (India IGA) with the Govt. of US on 9 July 2015 and joined the Multilateral Competent Authority Agreement (MCAA) on 3 June For implementing India IGA and MCAA, necessary amendments were made to section 285BA of the Income-tax Act, 1961 (Act). In exercise of the power conferred by section 285BA of the Act, Central Government notified the Income-tax (11 th Amendment) Rules, 2015 (Rules) to provide for registration of persons, due diligence procedures and maintenance and reporting of information by the financial institutions in India. This alert summarises the key provisions 1 of the Rules.

2 Background As per section 285BA(1)(k) of the Act, a reporting financial institution (RFI) is required to furnish a statement of reportable accounts maintained by it. Further, section 285BA(7) of the Act provides that Central Government may, by rules, specify the: the RFI to be registered with the prescribed income-tax authority; the nature of information and the manner in which such information shall be maintained by the RFI ; and the due diligence to be carried out by the RFI for the purpose of identification of any reportable accounts In exercise of the powers conferred by section 285BA(7) of the Act, the Central Government notified the Rules vide Notification no. 62 dated 7 August The Rules comprise of: Rule114F Definitions Rule 114G Information to be maintained and reported and reporting timelines Rule 114H Due diligence requirements and timelines This alert highlights the key provisions of Rule 114F, Rule 114G and Rule 114H. Rule 114F Definitions Some of the key definitions are summarised as under 2 : RFI [Rule 114F(7)] means: a financial institution [Rule 114F(3)] (other than a non-reporting financial institution 3 ) which is resident in India, but excludes any branch of such institution, that is located outside India; and any branch, of a financial institution (other than a non-reporting financial institution) which is not resident in India, if that branch is located in India Financial institution [Rule 114F(3)] means a custodial institution, a depository institution, an investment entity, or a specified insurance company 4. Reportable account [Rule 114F(6)] means a financial account [Rule 114F(1)] which has been identified, pursuant to the due diligence procedures provided in Rule 114H, as held by,- a reportable person [Rule 114(8)]; or an entity, not based in USA, with one or more controlling persons that is a specified U.S. person; or a passive non-financial entity with one or more controlling persons that are resident of a country outside India (except USA) Financial account [Rule 114F(1)] means an account (other than an excluded account 5 ) maintained by a financial institution, and includes- a depository account; 1 The Rules are extremely complex in wording. Though, in this Alert an attempt has been made to highlight key provisions. Any position may be taken only after consulting the local/global experts. 3 A Non Reporting Financial institution is elaborately defined in Rule 114F(5). It has 13 categories of institutions each of which has its own elaborate definition. 2 Please note that the terms mentioned herein below are not defined in detail as compared to the Rules. Accordingly, the reader is advised to refer the Rules issued for the detailed understanding. 4 Each of these categories has its own long and elaborate definition. 5 Numerous categories of excluded accounts are contained in explanation (h) to Rule 114F(1).

3 a custodial account; in the case of an investment entity (in certain situations), any equity or debt interest in the financial institution; any cash value insurance contract and any annuity contract issued or maintained by a financial institution Reportable person [Rule 114F(8)] means, one or more specified U.S. persons [Rule 114F(9)]; or one or more persons that is a resident of any country or territory outside India (except the USA) under the tax laws of such country or territory Specified U.S. person [Rule 114F(9)] means a U.S. Person [Rule 114F(10)]. U.S. person means [Rule 114F(10)],- an individual, being a citizen or resident of the USA; a partnership or corporation organized in the USA or under the laws of the USA or any State thereof; a trust if,- a court within the USA would have authority under applicable law to render orders or judgments concerning substantially all issues regarding administration of the trust; and one or more U.S. persons have the authority to control all substantial decisions of the trust; or an estate of a decedent who was a citizen or resident of the USA U.S. reportable account [Rule 114F(11)]means a financial account maintained by a RFI and, pursuant to the due diligence procedures provided in Rule 114H, is identified to be held by one or more specified U.S. persons or by an entity not based in the USA with one or more controlling persons which is a specified U.S. Person. Other reportable account [Rule 114H(2)(g)] means a reportable account which is not a U.S. reportable account. Rule 114G Information to be maintained and reported Information to be maintained: RFI shall maintain the following information with respect to each account which has been identified as such pursuant to due diligence procedures specified in Rule 114H of the Rules, as reportable account : 1. the name, address, taxpayer identification number (TIN) assigned to the account holder by the country or territory of his residence for tax purposes and date and place of birth (in the case of an individual); 2. in the case of any entity which has one or more controlling persons that are reportable persons: a. the name and address of the entity, TIN assigned to the entity by the country or territory of its residence; and b. the name, address, date and place of birth of each such controlling person and TIN assigned to such controlling person by the country or territory of his residence 3. the account number (or functional equivalent in the absence of an account number); 4. the account balance or value (including, in the case of a cash

4 value insurance contract or annuity contract, the cash value or surrender value) at the end of relevant calendar year or, if the account was closed during such year, immediately before closure; 5. in the case of any custodial account,- a. the total gross amount of interest, dividends and other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year; and b. the total gross proceeds from the sale or redemption of financial assets paid or credited to the account during the calendar year with respect to which the RFI acted as a custodian, broker, nominee, or otherwise as an agent for the account holder; 6. in the case of any depository account, the total gross amount of interest paid or credited to the account during the relevant calendar year; 8. in the case of any account held by a non-participating financial institution, for calendar year 2015 and 2016, the name of each nonparticipating financial institution to which payments have been made and the aggregate amount of such payments If the person being an account holder is a resident of more than one country, then RFI shall maintain TIN in respect of each such country. Information to be reported in statement of reportable account: Information to be reported is different for different calender year: For the calender year 2014: RFI shall furnish information mentioned at sr. no. 1 to 4 in respect of those reportable accounts which are U.S. reportable accounts. For the calender year 2015: RFI shall furnish information mentioned at sr. no. 1 to 4, 5(a), 6, 7, 8 in respect of those reportable accounts which are U.S. reportable accounts. For the calender year 2016: RFI shall furnish information mentioned at sr. no. 1 to 8 in respect of all reportable accounts. 7. in the case of any account other than that referred to in 5 or 6, the total gross amount paid or credited to the account holder with respect to the account during the relevant calendar year with respect to which the RFI is the obligor or debtor, including the aggregate amount of any redemption payments made to the account holder during the relevant calendar year; and For the calender year 2017 onwards: RFI shall furnish information mentioned at sr. no. 1 to 7 in respect of all reportable accounts. However, the following information is not required to be reported: For the calender year 2014, TIN of the U.S. reportable account is not required to be reported if the TIN is not in the records of the RFI as on 30 June If the reportable account is a preexisting account, TIN and date of birth is not required to be reported

5 if they are not available. But RFI shall obtain it by 31 December 2016 and shall report it with respect to calender year 2017 and subsequent year. The statement of reportable account shall be signed, verified and furnished by the Designated Director 8 of the RFI on the basis of information available with the institution. Place of birth is not required to be reported unless it is available in the electronica searchable data maintained by the RFI. Procedural aspects: RFI shall furnish the statement of reportable account under section 285BA(1)(K) of the Act with respect to each account which has been identified pursuant to due diligence procedures specified in Rule 114H of the Rules, as reportable accounts. Where no accounts are identified as reportable account pursuant to due diligence procedures then RFI shall furnish NIL statement of reportable account. Statement of reportable account shall be furnished in Form No. 61B for every calender year by 31 st May following that year. However, statement of reportable account for the calender year 2014 shall be furnished by 31 August The statement of reportable account shall be furnished electronically under a digital signature to the Director of Income-tax (Intelligence and Criminal Investigation) or the Joint Director of Income-tax (Intelligence and Criminal Investigation) 7. 6 Practically however, as time limits for due diligence Where the RFI is a non-resident, the statement of reportable account may be signed, verified and furnished by a person who holds a valid power of attorney from such Designated Director. The Designated Director or the person holding a valid power of attorney from such Designated Director shall digitally sign the statement of reportable account. RFI shall obtain Income Tax Reporting Entity Identification Number (ITDREIN) from the Principal Director General of Income-tax (Systems) and quote the same in Form No. 61B. However, no guidelines have been issued to date on how to register and obtain ITDREIN. In such situation, RFI may quote a dummy number in Form No. 61B. Form No. 61B includes: 1. Part A Statement Details - RFI are required to mention its name, Income Tax Department Reporting Entity Identification Number, Global Intermediary Identification Number, type of statement, principal officer details etc. 2. Part B Report Details - RFI are required to mention the account details, branch details, account summary, Individual details (for individual account holder), legal entity details (for entity account requirements can stretch beyond this date, each RFI may after evaluating its own circumstances consider if it is able to file a Nil report by this date. 7 The schema for the same has not been released till 24 August Each RFI is required to appoint a Designated Director and Principal Officer whose details are to be communicated to the Principal Commissioner of Income-tax (Systems).

6 holder), controlling persons details (for each controlling person of the entity etc. Rule 114 H- Due diligence requirement which is a cash value insurance contract or an annuity contract, the balance or value does not exceed an amount equivalent to two hundred and fifty thousand U.S. dollars as on the 30th June, 2014 For the purpose of due diligence, financial accounts maintained by the RFI are classified into pre-existing accounts and new accounts. Pre-existing accounts means financial accounts maintained by the RFI: In case of a U.S. reportable account as on 30 June 2014; and In case of other reportable account - as on 31 December New accounts means financial accounts maintained by the RFI: In case of a U.S. reportable account opened on or after 1 July 2014; and; In case of other reportable account opened on or after 1 January In case of other reportable account: which is a cash value insurance contract or an annuity contract, the RFI, under any other law for the time being in force in India, is prevented from selling such contract to a person who is not a resident of India for tax purposes Following pre-existing entity accounts are not required to be reviewed, identified and reported: In case of U.S. reportable account: where the balance or value as on 30 June 2014 does not exceed an amount equivalent to two hundred and fifty thousand U.S. dollars Pre-existing accounts are further classified into pre-existing individual accounts (accounts held by individuals) and pre-existing entity accounts (account held by entities). Similarly, new accounts are further classified into new individual accounts (accounts held by individuals) and new entity accounts (account held by entities). In case of other reportable account: where the balance or value as on 30 June 2014 does not exceed an amount equivalent to two hundred and fifty thousand U.S. dollars Following new individual accounts are not required to be reviewed, identified and reported: Following pre-existing individual accounts are not required to be reviewed, identified and reported: In case of U.S. reportable account: where the balance or value as on 30 June 2014 does not exceed an amount equivalent to fifty thousand U.S. dollars; or In case of U.S. reportable account: a depository account unless the account balance exceeds an amount equivalent to fifty thousand U.S. dollars at the end of any calendar year; a cash value insurance contract unless the cash value exceeds an amount equivalent to fifty thousand

7 U.S. dollars at the end of any calendar year For the purposes of determining the aggregate balance or value of financial accounts: a RFI shall be required to aggregate all financial accounts maintained by it, or by a related entity, but only to the extent that the computerised systems of that RFI links the financial accounts by reference to a data element such as client number or taxpayer identification number, and allows account balances or values to be aggregated; any account maintained in rupees or in any permissible currency (other than the U.S. dollar) as designated by the Reserve Bank of India shall be converted to U.S. dollar at the end of the reporting period as per the reference rates of the Reserve Bank of India and such converted amount in the U.S. dollar shall be used for determining the balance or value of a financial account provided in such rules; each holder of a jointly held financial account shall be attributed the entire balance or value of the jointly held financial account for purposes of applying the aggregation requirements; held by a person, to determine whether a financial account is a high value account, a RFI shall also be required, in the case of any financial accounts that a relationship manager knows, or has reason to know, are directly or indirectly owned, controlled, or established (other than in a fiduciary capacity) by the same person, to aggregate all such accounts Due diligence procedure for pre-existing individual accounts: In case of low value account 9 RFI are required to electronically search the data maintained by it to identify whether the account holder is a reportable person or not. In case of high value account 10 In addition to electronic search, in certain situations RFI are required to undertake paper record search and relationship manager enquiry to identify whether the account holder is a reportable person or not. Due diligence procedure for pre-existing entity accounts: RFI are required to review information maintained by it for regulatory or customer relationship purposes and are also required to obtain self-certification from an account holder to identify whether the account holder is a reportable person or not. Due diligence procedure for new individual accounts: In case of U.S. reportable account: RFI shall obtain a self-certification upon account opening or within (or within 90 days from the end of the calender year) from the account holder to determine whether the account holder is a reportable person or not. 9 in case of U.S. reportable account, where account balance or value exceeds an amount equivalent to fifty thousand U.S. dollars as on 30 June 2014 but does not exceed an amount equivalent to one million U.S. dollars and in case of other reportable account, where the account balance or value exceeds an amount equivalent to one million U.S. dollar as on 31 December in case of U.S. reportable account, where account balance or value exceeds an amount equivalent to one million U.S. dollars as on 30 June 2014 or 31 December of any subsequent year and in case of other reportable account, where the account balance or value exceeds an amount equivalent to one million U.S. dollar as on 31 December 2015 or 31 December of any subsequent year

8 In case of other reportable account: RFI shall obtain a self-certification upon account opening from the account holder to determine whether the account holder is a reportable person or not. Due diligence procedure for new entity accounts: RFI shall obtain a self-certification which may be a part of account opening documentation that allows it to determine whether an account is a reportable account or not. Alternative procedures: Alternative procedures have been prescribed for the purpose of due diligence of U.S. reportable accounts opened on or after 1 July 2014 but before the date of entry into force of the India IGA. Under these procedures, RFI have time upto one year from the date of the IGA coming into force to collect information/ self-certification from the account holders and reporting of prescribed information. As an alternative to these procedures, in respect of new entity accounts which are opened on or after 1 July 2014 and before 1 January 2015, the RFI may treat such accounts as pre-existing accounts and apply the due diligence procedures specified for pre-existing entity accounts (discussed above). Penalty implications: Section 271FA of the Act provides for the levy of penalty on RFI for several non-compliances as under: prescribed time limit - A sum of one hundred rupees shall be levied on RFI for everyday during which such failure continues Where such RFI who was required to furnish a statement reportable account has not furnished the same within the prescribed time limit and Income-tax authority has issued a notice requiring a RFI to furnish a statement within a period of 30 days from the date of service of such notice for failure to furnish a statement within the time limit prescribed in the notice, a sum of five hundred rupees shall be levied for everyday during which such failure continues, beginning from the day immediately following the day on which the time specified in the notice expires Section 271FAA of the Act provides for the levy of penalty of INR 50,000 on the RFI for furnishing inaccurate information in the statement of reportable account and where: inaccuracy is due to failure to comply with due diligence requirements or is deliberate on the part of the RFI; or the RFI knows of the inaccuracy at the time of furnishing the statement of reportable account, but does not inform the prescribed income-tax authority or such other authority or agency; or the RFI discovers the inaccuracy after the statement of reportable account is furnished and fails to inform and furnish the correct information to the income-tax authority or any other authority or agency within 10 days For failure to furnish a statement of reportable account under section 285BA of the Act within the

9 Comments India is one of the first countries to have adopted a combined approach for the implementation of India IGA and MCAA. Implementation of these reporting requirements is complex requiring elaborate processes which interalia can involve changes to be made to information technology systems. RFIs now will have to on a war footing, make sure that they are ready at the very earliest to comply with the reporting requirements. Some RFIs will have to report information in Form 61B by 31 August It is heard that the Central Board of Direct taxes will come out with detailed guidance to help taxpayers to implement these rules. Certain RFIs however may not have the luxury to wait for this guidance.

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