7 December 2016 EY Tax Alert Guidance Note on FATCA and CRS dated 30 November 2016 - Key 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 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, the 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. Pursuant to receiving feedback from various stakeholders, on 31 December 2015, the Government of India had released an updated version of this Guidance note which was further updated on 31 May 2016 (Second version). The Government of India has further updated this Guidance note on 30 November 2016 (Third version). This alert summarises the key clarifications contained in the Third version of the Guidance note dated 30 November 2016.
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 (FI) 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 FI globally to share information about the financial accounts held by the nonresidents (other than U.S. citizens and residents for tax purpose). To enable FI 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. 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 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 FI 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 which was further updated on 31 May 2016 (Second version). The Government of India has now updated this Guidance note on 30 November 2016 (Third version). Some of the key issues clarified in the Third version of the Guidance note released on 30 November 2016 are as under: Clarification on managed by used in the Investment Entity definition Explanation (c) to Rule 114F(3) of the Rules, defines investment entities into two types 1 : 1 (A) That primarily conducts as a business one or more of the following activities or operations for or on behalf of a customer, namely:- (i) trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading; or (ii) individual and collective portfolio management; or (iii) otherwise investing, administering, or managing financial assets or money on behalf of other persons; or (B) the gross income of which is primarily attributable to investing, reinvesting, or trading in financial assets, if the entity is managed by another entity that is a depository institution, a custodial institution, a specified insurance company, or an investment entity mentioned in sub-clause (A) of this clause.
, an Entity is said to be managed by another Entity, if the managing Entity performs, either directly or through another service provider, any of the activities or operations described in subparagraph (A) of Explanation (c) of Rule 114F(3) 1, on behalf of the managed Entity. However, the Entity does not manage another Entity if it does not have the discretionary authority to manage the Entity assets (in whole or part). Where an Entity is managed by a mix of FI, Non-Financial Entities (NFEs) or Individuals, the Entity is considered to be managed by another Entity that is Depository Institution, a Custodial Institution, a Specified Insurance Company, or an Investment Entity described above, if any of the managing entities is such another entity. Clarification on terms and phrases used in the definition of Investment entity A branch includes a unit, business, or office of a FI located in a jurisdiction in which the FI is resident, and a unit, business, or office of a FI located in the jurisdiction in which the FI is created or organised. The Guidance Note has further clarified that all units, businesses, or offices of a Reporting FI in a single jurisdiction shall be treated as a single branch. Clarification on Active Non-Financial Entities ( NFE ) the following entities will not be regarded as active NFE: Investment Fund; Private Equity Fund; Venture Capital Fund; Leveraged Buyout Fund; or Any Investment vehicle whose purpose is to acquire or fund companies and then hold interests in those companies as capital assets for investment purposes. the terms and phrases used in the definition of investment entity shall be interpreted in a manner consistent with similar language set forth in the definition of financial institution in the Financial Action Task Force Recommendations. Meaning of Branch of a FI The Guidance Note has defined branch of a FI to mean a unit, business, or office of a FI that is treated as a branch under the regulatory regime of a jurisdiction or that is otherwise regulated under the laws of a jurisdiction as separate from other offices, units, or branches of the FI. Time-limit for determining the status of the account holder on change of circumstances where the Reporting FI know, or have reason to know, that the selfcertification or other documentation associated with an account is incorrect or unreliable due to any change in circumstances, the Reporting FI must re-determine the status of the account in accordance with the due diligence procedure as soon as possible. This should be done by the latter of the last day of the relevant calendar year or 90 calendar days following the notice or discovery of the change in circumstances.
Clarification on change in circumstances change in circumstances shall include any change that results in the addition of information relevant to a person s status or otherwise conflicts with such person s status. Institutions can report correct and relevant information. This version of the guidance clarifies some of the issues. Given however, that other issues can come up for clarifications, further guidance or newer versions thereof can be expected in the future. In addition, a change in circumstances includes any change or addition of information to the account holder s account (including the addition, substitution, or other change of an account holder) or any change or addition of information to any account associated with such account (applying the account aggregation rules) if such change or addition of information affects the status of the account holder. Time period for which information with respect to financial accounts, to be maintained by the Reporting FI Every Reporting FI has to maintain information in respect of financial accounts in accordance with the procedure and manner as specified by its sectoral regulator from time to time. Where no such procedure and manner has been specified by sectoral regulator, the information in respect of financial accounts shall be maintained for at least 6 years. Comments The endeavour to achieve tax transparency is a continuous process. To facilitate this, it is reasonable to expect the guidance on FATCA and CRS to be updated at intervals so that Financial
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