India and the United States have signed an inter-governmental agreement (IGA) that will bring them into the fold of FATCA compliance. India’s Revenue Secretary Shaktikanta Das and US Ambassador Richard Verma signed the IGA on Thursday, July 9, 2015.
The Purpose of FATCA
The Foreign Account Tax Compliance Act (FATCA) is meant to help detect, discover and discourage offshore tax evasion by US taxpayers who have holdings in foreign accounts or a substantial ownership interest. Under this accord, foreign financial institutions (FFIs) of all types throughout India will not have to execute an agreement individually with the United States, but will be governed by this section of the Hiring Incentives to Restore Employment (HIRE) Act, which lays out the FATCA reporting requirements.
The US currently has signed IGAs with over 60 different jurisdictions to provide tax reporting transparency, to help fight tax evasion and to combat black money issues. More than 40 additional jurisdictions are currently “in substance” and are in the process of being negotiated to add even more under this umbrella to bring about universal reporting.
Why India is Joining FATCA
India has already been trying to stop the leak of black money and diminish the size of its shadow economy as part of its GDP. By joining FATCA, India is now being held to these more rigorous reporting requirements, which will help to detect and curtail the chances of large industrialists and others using their financial institutions for illicit purposes or to circulate income from black market ventures that have previously gone unreported.
“FATCA is a mutual effort to combat tax evasion and it would be mutually beneficial for both the countries…FATCA would detect, discourage offshore tax evasion. This kind of exchange of information is top priority for governments,” Verma said.
Revenue Secretary Das reinforced India’s stance, “We reassured the US government of the binding commitment to…fight the menace of evasion and bring transparency in the matters of payment of taxes which are legitimately due to the government.”
This latest agreement adds to the legitimacy of FATCA as India is becoming a large and growing international financial center. By signing this IGA, it paves the way for India to actively participate and be a part of CRS, the Common Reporting Standard or the Standard for Automatic Exchange of Financial Account Information. India has also signed onto this multilateral agreement that will require automatic information exchange and they will begin receiving data in 2017.
Hurdles are Still Ahead
While inking these agreements are a great first step, there are other important steps that must be accomplished before FFIs within India can correctly comply with FATCA:
- India’s government must ratify the IGA, establishing the legal basis to collect and disclose this sensitive information to the IRS.
- India must provide final guidance on how they want this material transmitted and reported, including which data fields need to be made available, what specific format it should be sent in and where the data are to be sent.
India Deadline to Report to the IRS by September 30th
The IRS has a deadline of September 30th for jurisdictions to transmit their FFIs data. In addition to the tasks outlined above, the FFIs data need to be submitted to the local jurisdiction, collected and packaged by the Indian Competent Authority and sent to the IRS. With less than three months before the IRS deadline, it will require sprinter’s speed to race to the completion.
When will guidance on reporting be issued? Will the IRS extend the reporting deadline or make revisions for India and other countries in a similar position to delay their reporting to next year and then require that they report for both calendar years 2015 and 2016? Questions still abound, but it guarantees to be a very interesting fall during this first year of required FATCA reporting.
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