With increasing globalization, many tax payers started making, holding and managing investments through offshore financial institutions outside their country of residence. Such offshore money goes untaxed and such offshore tax evasion was considered a serious problem for jurisdictions all over the world. In this backdrop, cooperation between tax administrations is considered critical in the fight against tax evasion and protecting the integrity of tax systems. A key aspect of this cooperation is the exchange of information between tax administrations of countries.
The US Government, in 2010, enacted a regulation — The Foreign Accounts Tax Compliance Act (FATCA), which became effective 1 July 2014. The FATCA regime was designed to combat tax evasion by US persons. It requires foreign financial institutions (FFI) outside the US to identify US account holders and report their account details on an annual basis to the Internal Revenue Services. Failure to report by the FFIs could lead to 30% withholding tax on US-sourced income of such FFIs. Interestingly, under FATCA, reporting is to be undertaken one way, i.e., all countries signatory to FATCA need to mandatorily report to the US but the reverse, i.e., the US reporting to these countries, is not envisaged.
Similar to FATCA, certain EU countries executed Inter Governmental Agreements for Exchange of Information (EoI). Recognizing the benefits of this, in 2014, the Organisation for Economic Co-operation and Development (OECD) along with G20 countries released a standard for automatic exchange of financial account information in tax matters i.e. Common Reporting Standard (Standard or CRS). The Standard consists of the reporting and due diligence rules, and a model Competent Authority Agreement (CAA).
On 29 October 2014, 51 jurisdictions joined the Multilateral Competent Authority Agreement (MCAA) at Berlin, which provides a framework for EoI on automatic basis according to the Standard. India signed the MCAA on 3 June 2015 and is one of the early adopters of the CRS. To facilitate reporting under FATCA and CRS, India amended Section 285BA of the Income-tax Act, 1961 and notified Rule 114F to 114H in the Income-tax Rules.
According to the MCAA and the Standard, henceforth, financial institutions (FIs) in India are required to establish systems to report data relating to foreign accounts to the Income Tax Department for the calendar year starting January 2016. Similarly, FIs situated in 60 jurisdictions outside India also need to put systems in place to facilitate EoI among the other countries with India.
The model CRS, published by the OECD, is designed to facilitate the automatic exchange of financial account information between governments using standard due diligence and reporting methods. Due diligence processes differentiate new accounts from pre-existing accounts, as well as accounts held by individuals from the ones that are held by entities.
CRS requires FIs in participating jurisdictions to identify account holders who are tax residents in another participating jurisdiction and report their information on an annual basis to their local tax authority, for onward exchange to the tax authority in which the account holder is a resident.
The FIs covered by the standard include custodial institutions (e.g., custodians and depository participants), depository institutions (e.g., banks and other deposit taking FIs), investment entities (e.g., mutual funds, private equity funds, asset management companies) and specified insurance companies.
The information required to be reported under CRS includes name, account number, residential address, date of birth of individuals, account balance, tax payer identification number, gross amounts paid to the account in a year, total gross proceeds paid or credited to the account, etc.
Reportable accounts include accounts held by individuals and entities (which includes companies, trusts, partnership firms and foundations). In case of entities that are not FIs and are passive non-financial entities (Passive NFEs), with certain exceptions, the standard requires to “look through” these Passive NFEs and report the ultimate natural person controlling these Passive NFEs.
In case of Trusts, the standard requires to report “controlling persons,” which has been defined to include trustee, settlor, beneficiaries and protector. Where such “controlling persons” are entities, the standard mandates “look-through” approach to ascertain the ultimate natural person who is in control of these entities, applying the recommendation of the Finance Action Task Force 2012. Accordingly, if there are offshore entities whose ultimate owners/controlling persons are Indian tax residents, the reporting of these should be undertaken by the foreign FI to the revenue authorities of the respective jurisdiction. A similar situation would exist for non-residents having interest in Indian assets through entities or Trusts.
As of 1 October 2015, 61 jurisdictions are early adopters, including India. FIs in early adopting countries including India will be required to implement CRS from 1 January 2016, with the first reporting and exchange of information taking place in September 2017, in respect of the calendar year 2016.
Given the government agenda to curb black money and tax evasion, and India being an early adopter of CRS, the CRS will benefit the Indian tax authorities. It will assist in regular and timely reporting of information on account holders of foreign financial institutions, who are tax residents in India.
However, in order to effectively utilize the bulk data that would be reported from foreign countries, suitable systems need to be introduced and designed by the Indian tax department to identify, record, process and analyze details pertaining to tax payers having reportable accounts.
It would be pertinent to understand what steps the Government/Tax Department takes in the next finance budget to introduce laws relating to CRS. This, in turn, would provide further clarity to tax payers and other stakeholders in terms of the government action to curb black money and tax evasion.