Indian businesses in US risk higher penal taxes on fund transfer
NEW DELHI: Indian entities having businesses in the US risk higher penal taxes in the US on any fund transfer to the country if New Delhi fails to endorse a pact for information exchange by December 31 on grounds of confidentiality.
New Delhi will find it difficult to sign the US proposed Foreign Account Tax Compliance Act, or FATCA, in the wake of Supreme Court’s insistence for disclosure of information on foreign accounts even as government pleaded doing so would violate bilateral tax treaties. The FATCA , which is due to come into force from January 1 , proposes a 30% withholding tax on any payment made to a foreign financial institution by a US firm if the remittance is to a country that has not signed the agreement. Tax experts warn of serious consequences for Indian entities in the US.
“Inbound remittances to Indian financial institutions and individuals which are in the nature of US with holdable payments that is fixed, determinable, annual, periodical income would suffer a 30% withholding tax in case the inter-governmental agreement is not signed,” said Anish Thakkar, partner (tax and regulatory services), EY.
Thakkar said there could be a potential risk of US financial institutions remitting money to India conservatively withholding 30% tax in cases which may not clearly fall outside the scope of withholdable payments.
The RBI has already flagged the issue with the government as any delay in signing the pact could hurt flow of capital into the country with financial firms finding it difficult to undertake business in non-compliant countries due to possible action from US tax authorities and additional tax burden that they could face.
The government had in an affidavit filed in Supreme Court in the ongoing black money case sought clarity on the court’s earlier order on confidentiality clause in international treaties.
This would also pose problems for Indian companies in the IT sector or exporters receiving remittances from the US. India needs large flows to fund its current account deficit. “Income received by intermediaries in the financial services, IT and IT enabled sector could also face adverse fiscal implications in case of failure to cooperate under FATCA,” said Sunil Jain, partner, J Sagar & Associates.
FATCA was enacted by the US in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act to combat tax evasion by US nationals holding investments in offshore accounts.
Countries can enter into intergovernmental agreement at bilateral level with the US under this arrangement to protect interest of their financial firms facing penal taxes in the US, an approach taken by India. New Delhi has already discussed finalized the contours of the framework but is yet to formally sign it. “There would be consequences if India does not sign the agreement now,” said Rahul Garg, leader, direct tax practice, PwC.
FATCA makes it mandatory for a foreign financial institutions having presence in the US to report accounts of US citizens held with them and also accounts of certain foreign entities with substantial US owners.
