FATCA and CRS

The Foreign Account Tax Compliance Act (FATCA) is a piece of US tax regulation that aims to combat tax evasion by US persons opening accounts offshore. FATCA became effective July 1, 2014. It enhances due diligence and information reporting requirements for both individual and entity accounts. On 9 July 2015, India signed Model 1 Inter-Governmental Agreement (IGA) with the US IRS for implementation of FATCA.

FATCA aims to detect and discourage offshore tax evasion by U.S. citizens or U.S. residents by requiring financial institutions to identify and report accounts held by U.S. persons. Where account holders refuse to be identified, financial institutions are required to report them based on information available.

Impact on financial institutions: Financial Institutions like Citibank are required to have an in-depth knowledge of account holders and detail reporting requirements.

Impact on account holders: Additional disclosure requirements.

Responsibilities of Citibank are:

1. Review the customer information at the time of onboarding all new clients if they have any US connection and collect a tax form/self-certification accordingly.
2. Review the existing customer base to identify those customers who are reportable under FATCA.
3. Report information to local regulator in prescribed format for the reportable accounts.

The term ‘US person’ has been defined in Section 7701(a)(30). Below categories of account holders are covered under definition of US person:

1. A citizen or resident of the United States
2. Holders of US residence visa "Green Card" (until cancelled with the Internal Revenue Service)
3. Corporations/Companies formed under the laws of the United States, any of US States or the District of Columbia.
4. A partnership formed under the laws of the United States, a State or the District of Columbia.
5. An estate of a decedent who is a US person
6. A trust if
   • A court within the United States is able to exercise primary supervision over the administration of the trust (the “Court test”) and
   • One or more US persons have the authority to control all substantial decisions of the trust (the “Control test”)
7. The government of the United States, any State, municipality or other political subdivision, any wholly owned agency or instrumentality of such governments

An FFI is a non-U.S. entity that is a custodial institution, a depository institution, an investment entity, or a specified insurance company. Please refer to Income–tax (11th Amendment) Rules, 2015 (link to be provided to the document- Indian guidance issued by Ministry of Finance in case of upload of FAQ on website or mention the link to visit in case of physical form while sending the letter) for further clarification on meaning of custodial institution, a depository institution and investment entity.

These are entities that are excluded from the definition of an FFI and not subject to withholding:

• Excepted nonfinancial group entities;
• Excepted nonfinancial start-up companies or companies entering a new line of business;
• Excepted nonfinancial entities in liquidation or bankruptcy;
• Excepted inter-affiliate FFIs;
• Section 501(c) entities;
• Non-profit organizations;
• NFFEs that are publicly traded corporations (and their affiliates);
• Excepted territory NFFEs;
• Active NFFEs (less than 50 % of the entity’s gross income for the preceding financial year is passive income and less than 50 % of the assets held by the entity during the preceding financial year are assets that produce or are held for the production of passive income)
• Direct Reporting NFFEs; and
• Sponsored Direct Reporting NFFEs.

Passive income includes income by way of,-

• Dividends;
• Interest;
• Income equivalent to interest;
• Rents and royalties (other than rents and royalties derived in the active conduct of a business conducted, at least in part, by employees of the non-financial entity);
• Annuities;
• The excess of gains over losses from the sale or exchange of financial assets which gives rise to the passive income;
• The excess of gains over losses from transactions (including futures, forwards, options, and similar transactions) in any financial assets;
• The excess of foreign currency gains over foreign currency losses;
• Net income from swaps; or
• Amounts received under cash value insurance contracts:

Provided that passive income will not include, in the case of a non-financial entity that regularly acts as a dealer in financial assets, any income from any transaction entered into in the ordinary course of such dealer’s business as such a dealer.

A Passive NFFE is a non-US entity which is an active non-Financial entity or an Excepted NFFE (including an Active NFFE). FATCA requires banks to identify if any of the natural owners of the passive NFFE are US person and therefore if you chose to select passive NFFE as your Chapter 4 status, you are requested to provide a self-certification for all the controlling persons (link to be provided for self-certification format – FATCA declaration in case of upload of FAQ on website or mention the link to visit in case of physical form while sending the letter)

Controlling person means the natural person who exercises control over an entity and includes a beneficial owner as determined under rule 9 (3) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005.

Relevant summary is as below:

• Company: Controlling ownership interest means ownership by a natural person of/entitlement to more than 25 percent of shares or capital or profits of the company;
• Partnership Firm, Unincorporated Association and Body of Individuals: Controlling ownership interest means ownership by a natural person of/entitlement to more than 25 percent of shares or capital or profits of the firm or unincorporated association or body of individuals.
• Trust: The beneficiaries with 15% or more interest in the trust, the settler of the trust, the trustee, the protector, and any other natural person exercising ultimate effective control over the trust through a chain of control or ownership
• If the account holder or the owner of the controlling interest is a company listed on a stock exchange, or is a majority-owned subsidiary of such a company, it is not necessary to identify and verify the identity of any shareholder or beneficial owner of such companies

In cases where there exists doubt under the above summary as to whether the person with the controlling ownership interest is the beneficial owner or where no natural person exerts control through ownership interests, controlling person should be treated as the natural person exercising control over the juridical person through other means.

It should be noted that controlling persons of Passive NFFE are required to fill the FATCA self-certification for them as well and submit to the financial institution. Wherever the controlling person of a Passive NFFE is US person, Form W9 should be filled and given by the controlling person in addition to the tax form for the entity.

While FATCA will impact all financial institutions, every financial institution may chose its own methodology of complying to FATCA requirements.

Citibank will collect information on the entity type and FATCA status of the customer, either through a tax form or self-certification. A tax form can be any one of the below:

The tax forms can be downloaded from https://apps.irs.gov/app/picklist/list/formsPublications.html

An authorised individual must sign the form on behalf of the Account Holder and indicate the capacity (officer title, or power of attorney, etc.) in which he/she is signing.

Chapter 3 status of an entity denotes the type of corporate structure of an entity. It may be corporation, partnership, different types of trust etc.

Chapter 4 status is the FATCA status of an entity. Depending on the nature of business activities, an entity may choose its FATCA status. An entity may be a Foreign Financial Institution, Excepted NFFE, Passive NFFE etc. Please refer to the tax forms (Click here) for comprehensive list of Chapter 4 status.