12 January 2016 EY Tax Alert Updated Guidance Note on Implementation of Reporting Requirements under Rules 114F to 114H of the Income-tax Rules, 1962- Key additions/ clarifications 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 The Central Government had notified Income-tax (11th Amendment) Rules, 2015 (Rules) vide Notification no. 62 dated 7 August 2015 [Rule 114F to Rule 114H of the Income-tax Rules, 1962 (Rules)] incorporating the requirements of the Inter- Governmental Agreement signed by the Government of India with the Government of the United States of America for compliance with Foreign Account Tax Compliance Act (FATCA) and the requirements of the Common Reporting Standard (CRS) issued by the Organisation for Economic Co-operation and Development (OECD). In this regard, Guidance on implementation of reporting requirements under Rules 114F to 114H of the Rules (Guidance note) was released by the Government of India on 31 August 2015 to explain the complex reporting requirements and provide further guidance wherever required. All the stakeholders were requested to provide their feedback and suggestions so that an updated Guidance note can be issued before 1 January 2016. On 31 December 2015, the Government of India has released an updated version of this Guidance note. This alert summarises key points relating to compliance with the requirements of the Rules that were added/ clarified in the updated version of the Guidance note visà-vis its earlier version released on 31 August 2015.
Background The 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 Cooperation 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 2015. the Income tax (11th 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. Subsequently, Guidance on implementation of reporting requirements under Rules 114F to 114H of the Rules (Guidance note) was released by the Government of India to explain the complex reporting requirements and provide further guidance wherever required. All the stakeholders were requested to provide their feedback and suggestions so that an updated Guidance note can be issued before 1 January 2016. On 31 December 2015, the Government of India released an updated version of this Guidance note. Some of the key issues clarified in the updated version of the Guidance note are as under: Clarification on treatment of a Hindu Undivided Family (HUF) It is now clarified that HUF should be treated as an Entity for the purpose of compliance with the Rules. Clarification on Insurance companies, Depository institution and Investment entity For implementing the India IGA and the MCAA, necessary amendments were made to section 285BA of the Incometax Act, 1961 (Act). In exercise of the powers conferred by section 285BA of the Act, Central Government notified Insurance companies that only provide general insurance or term life insurance and reinsurance companies that only provide indemnity reinsurance contracts should not be treated as Financial Institutions 12. 12 This insurance Regulatory and Development Authority of India has issued a circular on 21 December 2015 asking all non-life insurance companies to register on the web site of the Income-tax Department. This classification may require the IRDA to rescind or modify its circular.
Further, it is clarified that Non-Banking Financial Companies would be considered as Depository institution. Also, it is clarified that investment entities would include collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund, venture capital fund, leveraged buyout fund, or any other similar investment vehicle established with an investment strategy of investing, reinvesting or trading in Financial Assets. Clarification with respect to controlling person Controlling Person is defined in Explanation (B) to Rule 114F(6) of the Rules. Controlling person means the natural person who exercises control over an entity and includes a beneficial owner as determined under sub-rule (3) of Rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005. It has been specified that in determining the beneficial owner, the procedure specified in the following circulars as amended from time to time shall be applied, namely: DBOD.AML.BC.No.71/14.01.001/ 2012-13, issued on the 18 January 2013 by the Reserve Bank of India; CIR/MIRSD/2/2013, issued on the 24 January 2013 by the Securities and Exchange Board of India; IRDA/SDD/GDL/CIR/019/02/2013, issued on the 4 February 2013 by the Insurance Regulatory and Development Authority The Guidance note has clarified the procedure to be followed for identifying the beneficial owner, which is as under: In case of a company, beneficial owner is a natural person who whether acting alone or together, or through one or more juridical person that: 1. has a controlling ownership interest (>25%); or 2. who exercises control through right to appoint majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements In case of a partnership firm, beneficial owner is a natural person who whether acting alone or together, or through one or more juridical person that has ownership of/ entitlement to more than fifteen per cent (15 %) of capital or profits of the partnership In case of unincorporated association or body of Individuals, beneficial owner is a natural person who whether acting alone or together, or through one or more juridical person that has ownership of/ entitlement to more than fifteen per cent (15 %) of capital or profits of such association or body of individuals. Where no natural person is identified, the beneficial owner is the relevant natural person who holds the position of senior managing official. Where the client or the owner of the controlling interest is a company listed on a stock exchange, or is a subsidiary of such a company, it is not necessary to identify and verify the identity of
any shareholder or beneficial owner of such companies. The Guidance note further clarifies that in case of a trust, the controlling person means the settlor, the trustees, the protector (if any), the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust, and in case of a legal arrangement other than a trust, the said expression means the person in equivalent or similar position. If the settlor, trustee, protector, or beneficiary is an Entity, the reporting financial institution must identify the controlling persons of such Entity as discussed above. Clarification on registration and reporting requirements for institutions which are involved in more than one category of activity Where a reporting entity qualifies for more than one category of financial institution [i.e. depository institution and custodial institution], then reporting entity should get registered for all different categories and submit different Form 61B for different types of financial institutions. It has been clarified that a depository account need not be an interest bearing account. Thus, a financial account maintained with a depository institution which has an account balance on which no interest is paid will be treated as a depository account and will not be excluded from the purview of the financial account. It is also clarified that custodial account would include Mutual Fund holding in a de-materialised format which would be required to be reported by depository/ depository participant only. If mutual fund units are held in physical format, the entity issuing the units will be responsible for reporting such custodial accounts. In respect of cash value insurance contracts, it is clarified that cash value insurance contract is a type of investment product that has an element of life insurance attached to it. The life insurance element is often small compared to the investment element of the contract. There may be a situation in which one financial institution maintains more than one type of accounts [for example both depository as well as custodial account]. However, the financial institution may qualify as only one type of financial institution. In this case, financial institution shall register only as one type of financial institution but shall report both types of accounts. Clarification with respect to Depository accounts, Custodial accounts and cash value insurance contracts Thus, cash value insurance contract is a contact where policyholder is entitled to receive a payment on surrender or termination of the contract. Accordingly, cash value insurance contracts shall not include: Indemnity insurance contracts between insurance companies; m life insurance contracts; Property or motor insurance; economic loss arising from specified circumstances, for example personal injury, theft, etc.;
not have a cash value Clarification on centralised facilities for clearing, settlement and deposit of securities Social Security Number; National Insurance Number; itizen or Personal Identification Code or Number; An entity designated under federal legislation to provide centralized facilities for the clearing, settlement and deposit of securities, commonly referred to as clearing corporation, will not be treated as maintaining financial accounts. In India, such entities are National Securities Clearing Corporation Ltd (NSCCL), Indian Clearing Corporation Ltd (ICCL) and MCX-SX Clearing Corporation Ltd (MCX-SXCCL). Clarification on aggregation rules exempt products If a financial account is exempt from being treated as a financial account, it should not be included for the purposes of aggregation. Consequently, if an individual holds a personal retirement account as well as several depository accounts with the same financial institution and its information technology systems allow all these holdings to be linked, then only the depository accounts shall be aggregated and not the personal retirement account. Clarification on Tax Identification Number (TIN) Many countries do not issue TIN to their taxpayers. In such situation, some other high integrity number with an equivalent level of identification (a functional equivalent) shall be reported by the reporting financial institutions. Examples of such numbers are as under: In case of Entities, reporting financial institutions shall report a business or company registration code/number where no TIN has been issued. Clarification on curing of Indicia in case of pre-existing individual accounts There may be occasions when the electronic record search gives indications of residence in any country or territory outside India that the reporting financial institution considers may be incorrect. In such circumstances the reporting financial institutions may take steps to cure the information before treating the account holder as a reportable person. Where the reporting financial institution holds information about the account holder that includes any of a current mailing address in any country or territory outside India, one or more telephone numbers in any country or territory outside India (no telephone number in India), standing instructions, to transfer funds to an account maintained in any country or territory outside India (other than a Depository Account in the case of CRS), or a currently effective power of attorney or signatory authority granted to a person with an address in any country or territory outside India,
then, the reporting financial institution must obtain a self-certification from the account holder to establish the jurisdiction of residence. For this purpose, the reporting financial institution can rely on the self-certifications it has previously reviewed and maintained a record of, but in either case the self-certification must be supported by the documentary evidence. If the self-certification supported by documentary evidence establishes that the account holder is not a reportable person then the reporting financial institution is not required to treat the account holder as reportable person. Clarification with respect to reporting of jurisdiction of residence After carrying out the due diligence, if an account is identified as reportable account, reporting financial institution must report the jurisdiction of residence of account holder or controlling person, as the case may be. If there is more than one jurisdiction of residences, all such residences must be reported. Clarification on issues related to trust The Guidance note has clarified the due diligence and reporting requirements for trust where trust itself is a reporting financial institution. Further, the Guidance note has also clarified the due diligence and reporting requirements for the reporting financial institution that maintains a financial account held by a trust (where trust is a non-financial entity). Draft format for self-certification A draft format of self-certification has been released which can be used by the reporting financial institutions for the purpose of the undertaking due diligence of financial accounts maintained by them. Comments The clarifications given in the updated guidance note should be useful to the FIs for facilitating compliance. The jurisdiction of residence identified as a result of due diligence are without prejudice to any residence determination made by the reporting financial institution for any other tax purposes. Clarification with respect to reporting of interest paid or credited For depository and custodial account, it is clarified that, the total gross amount of interest paid or credited to the account which needs to be reported is the actual interest paid or credited to the account and will not include accrued interest. However, given that the compliance with the Rules has just begun for the reporting financial institutions in India, to address the evolving issues with respect to compliance with the Rules, in future, we may possibly see further versions of the updated Guidance note being released by the Government of India.
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