Warning bells till Christmas for foreign account holders

MUMBAI: Since last month, Indians with overseas bank accounts are receiving letters from offshore financial institutions, asking them to disclose ‘tax residency status’ before Christmas.

If they don’t, banks holding these accounts would share whatever information they have on such account holders with the Indian government. Many account holders are in a dilemma, fearing that responding to such queries would give the Indian tax department leverage to trigger a chain of questions. Some of these individuals — particularly those who deliberately did not report foreign assets in returns — are willing to take a chance and challenge the tax office if hauled up later. Non-resident Indians, many of whom had originally opened bank accounts in tax havens by stating their addresses in India, will now have to produce proof of current tax residency status. However, those who had closed their accounts before December 31, 2015, would escape, at least temporarily, from the glare of tax authorities.

According to a few emails reviewed by ET, the communications from offshore banks are blunt and unambiguous. For instance, a large British banking group grimly reminds its clients that “..if we don’t hear from you by the date (December 24, 2017) specified in the enclosed letter, we may be required to report you for tax purposes and accordingly we may be required to share your details to the appropriate tax authority.”

And what would be information the bank could end up revealing? Besides an account holder’s name, address and date of birth, the institution would share the account balance or value at the end of the calendar year, gross amount of interest, dividends and other income paid or credited to the account, as well as gross proceeds from sale or redemption paid or credited to the financial account.

All this is part of automatic exchange of information and common reporting standard (CRS) that more than 90 jurisdictions, including the UK, UAE, Singapore, Mauritius, Jersey and India have agreed to follow.

The CRS legislation requires financial institutions worldwide to play a key role in giving taxmen access and insight to taxpayers’ financial account information. Initially ignored, many are now beginning to sense the implications of the CRS. “The bank may also contact an individual if it feels it has inadequate information to determine the person’s country of residence for tax purposes… Likewise, Indian tax authorities may also be compiling similar details of expatriates who are citizens or domicile of other countries but residing or working in India,” said Mitil Chokshi, senior partner, Chokshi & Chokshi LLP.

But, for the tax office, the exercise could mean scanning a mountain of data. According to senior chartered accountant Dilip Lakhani, “Accounts held by Indian passport holders existing as on January 1, 2016, will be shared. Data will flow irrespective of tax status of the account holder. Information on thousands of Indian students studying abroad will also come in. Tax authorities here will have to filter this to determine concealed income and then proceed under the Black Money Act.” In India, non-reporting offshore bank accounts and assets may attract penalty and even imprisonment. In recent months, the tax department has shot notices for failing to disclose foreign bank accounts in tax returns.

“For many, these are legitimate investments with tax-paid earnings and made under LRS (liberalised remittance scheme monitored by the Reserve Bank of India). Some were under the impression that accounts opened under LRS need not be stated in tax returns,” said a wealth manager with an MNC bank.

A person with accounts with the same bank in different countries will have to separately inform various offices of the bank. On obtaining information on offshore discretionary trusts — a vehicle used by many Indian families to hold fund and assets abroad — there is a lack of uniformity among banks. “Some are seeking information on trustees while others want details on the trust beneficiaries,” said a lawyer who refused to be quoted.

Typically, overseas non-resident family members, lawyers and service providers serve as trustees while members of the family owning assets are named beneficiaries.