Financial institutions asked to register for FATCA by December 31

NEW DELHI: All Indian financial institutions with exposure to the US will have to register by tomorrow with the American tax authorities to avoid a hefty penalty tax of up to 30 per cent under the new Foreign Accounts Tax Compliance Act (FATCA).

While it has extended the deadline for signing of Inter Governmental Agreements (IGAs) with India and some other countries, the US Internal Revenue Service (IRS) has made it clear that all Foreign Financial Institutions (FFIs) need to register for FATCA and get a Global Intermediary Identification Number (GIIN) before January 1, 2015.

India agreed “in substance” earlier this year for the proposed IGA with the US in this regard, while it was to sign the pact by December 31, 2014 as per the previous deadline.

As per the initial agreement, financial sector regulators including Sebi had asked all intermediaries in June to register themselves for the FATCA compliance by December 31 and get their GIINs.

As the deadline ends tomorrow, financial sector regulators Sebi and RBI said in separate circulars that they were informed today by the government about the deadline and also about the latest clarifications issued by the IRS.

“The Government of India has informed Sebi vide communication dated December 30, 2014 that as per the FAQ published on the US IRS website, FFIs in Model 1 jurisdictions need to register with the US IRS and obtain a GIIN before January 1, 2015, or at the earliest, in order to avoid withholding.

“The FFIs who have registered but have not obtained a GIIN should indicate to the withholding agents that the GIIN is applied for,” Sebi said, while releasing relevant details from the FAQ published by IRS on December 22.

“All Sebi-registered intermediaries who maintain US reportable accounts, as defined in the Model 1 IGA, may take action appropriately,” the regulator said.

As per the ‘Model 1’ IGA proposed between India and the US, a financial institution will be required to submit the necessary information to the regulators and tax authorities in India, which in turn would pass on the details to the IRS. For other IGAs, the institutions would report directly to the IRS, failing which they will face the withholding tax.

Close to 1,000 Indian financial institutions and their overseas units were believed to have already registered with IRS and got their GIINs.

In its circular, RBI said that “the FFIs who have registered but have not obtained a GIIN should indicate to the withholding agents that the GIIN is applied for, which may be verified by the withholding agents in 90 days”.

As per the IRS, “a jurisdiction that is treated as if it has an IGA in effect, but that has not yet signed an IGA, retains such status beyond December 31, 2014, provided that the jurisdiction continues to demonstrate firm resolve to sign the IGA that was agreed in substance.”

India is one such jurisdiction. IRS said that this additional time to sign the IGA would not lead to any changes in the timing for an FFI in such a jurisdiction to register and obtain a GIIN before January 1, 2015.

Under the FATCA regime, overseas financial institutions need to provide details about accounts held by Americans or foreign entities where the US taxpayers hold a substantial ownership interest, as also about all major transactions.

If a financial institution does not comply to FATCA, it would have to pay 30 per cent penalty tax on all its US revenues, including dividend, interest, fees and sales.

The reporting and other compliance burdens on the financial institutions get simplified if their country has signed an IGA in this regard with the US.

By way of a circular issued in June, regulator Sebi had informed market entities, including stock exchanges, mutual funds, portfolio managers and depositories, about FATCA.

Similar circulars have been issued by other regulators for entities under their respective jurisdictions.

Finance Minister Arun Jaitley recently said the consequences of not signing the FATCA agreement with the US could be disastrous and it would negate the efforts being undertaken by our government to revive the economy.

Earlier this year, India and the US “reached an agreement in substance on the terms of the Inter Governmental Agreement” and India is already “treated as having an IGA in effect from April 11, 2014”.

At that time, it was agreed that India would sign the IGA by December 31, 2014.

Earlier also, Sebi and other regulators had asked the Indian financial institutions and their overseas units to go ahead with their registration with the US tax department, Internal Revenue Service (IRS), which is the nodal agency for the FATCA compliance, by December 31.

The GIIN would help the US authorities track any possible non-compliance in foreign jurisdictions by the resident individuals and companies from the US.

In the meantime, certain reservations have been expressed by various quarters, including from the government side and from the industry participants, about some FATCA provisions.