1. Difference between FATCA & CRS at a glance
The need for a system to validate and improve tax compliance globally has led to the formation of FATCA and CRS. Before talking about FATCA-CRS compliance, let us understand the difference between the two below:
The United States Tax Department launched FATCA in the year 2010 to promote tax compliance and discourage tax evasion. FACTA stands for Foreign Account Tax Compliance Act.
On the other hand, CRS is roughly a more international version of FATCA. While the former is only for US persons, the latter is applicable for citizens of every registered country.
|Needs the help of a financial institution to find US persons||CRS has 90 countries (except the US) committed to it – has a wider scope|
|It is not compulsory to report on financial accounts always||Reporting your financial accounts is mandatory under CRS|
|Individual account should have more than $50,000 balance||No de minimis limit under CRS|
|Number of US people reported under FATCA are only a few thousands||Several millions of accounts are reported under CRS|
Therefore, both FATCA and CRS prevent offshore investors from avoiding taxes and hoarding unaccounted cash overseas. However, it required cooperation from the tax authorities from all the G20 and OECD countries. Finally, the Common Reporting Standard or CRS was introduced.
2. Foreign Account Tax Compliance Act
FATCA came into existence to fight tax evasion and to ensure strict adherence to tax rules. Its main objective is to identify and prevent offshore tax avoidance by US citizens or residents. In short, an attempt to track US persons earning from overseas investments and stash assets in other countries!
FATCA enables financial institutions to withhold tax if the US persons refuse to meet the documentation requirements. For this, all financial institutions registered under this Act should immediately notify the US tax department when they come across US persons attempting to evade tax. Hence, all FATCA-registered banks report such account holders (with the available information) immediately. This Act has a direct and profound impact on US multinationals and Foreign Financial Institutions.
3. US-India agreement to implement FATCA
FATCA ensures tax compliance and transformation at a global level. It presents foreign financial institutions a chance to improve and streamline their tax reporting process. It also gives them visibility in the foreign country and gains the trust of investors.
To accommodate FATCA, the government had inserted Rules 114F to 114H and Form 61B in the Income Tax Act in 2014. The Indian Government also signed the Inter-Governmental Agreement (IGA) with the United States of America in the year 2015 for the implementation of FATCA. According to the agreement, Indian tax officials are required to obtain specific account information from US investors. The goal was to ensure tax compliance by the US citizens while increasing transparency for their Internal Revenue Service (IRS). This gave a legal basis for the Reporting Financial Institutions to maintain and report personal and income details.
4. FATCA declaration for NRIs
Effective from January 2016, they made it mandatory for all Indian and NRI investors (existing and new) to file a FATCA self-declaration. While the details might be slightly different with each financial institution, the standard information they mandate are:
b. Permanent Account Number (PAN)
d. Place (city/state) of birth
e. Country of birth
g. Gross Annual Income
i. Whether the resident of another country? If yes, then the country of residence, Tax ID number, and type
The declaration asks explicitly to include the USA as a country of residence if you are a US citizen or a green cardholder. This holds even if you have moved to India and are now an Indian resident. Further, this declaration specifies that the Central Board of Direct Taxes (CBDT) has already covered this issuance in the rules 114F-114H. As a result, the tax authorities will have access to all relevant information. Therefore, please intimate the respective financial institution within 30 days in case of any change in the above information.
5. Common Reporting Standard or CRS
The Organisation for Economic Cooperation and Development (OECD) developed the Common Reporting Standard (CRS) for Automatic Exchange of Information (AEoI). CRS mandates financial institutions across countries to provide respective tax authorities information about their citizens and their wealth overseas. This can help governments in obtaining information about the financial assets held by its citizens internationally – for tax reasons. Till now, more than 90 countries have agreed to follow this global standard.
India too has signed a multilateral agreement to transfer personal and account information of another country’s citizen to their respective tax authority. Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters under the CRS rules refers to this.
6. CRS Declaration
Most of the details mandated under CRS self-declaration are similar to that of FATCA. However, CRS covers taxpayers from over 90 countries, as opposed to FATCA, which is applicable only for the US taxpayers. You can download the CRS self-declaration form from any offshore mutual fund website. Alternatively, you may also visit the fund house service centres or the Asset Management Company (AMC) office.
Submit the self-declaration either online or offline at any of the fund company branches. For instance, Registrar and Transfer Agencies such as CAMS offer this service. To complete the registration, you will be required to enter the OTP, generated using your PAN number. CRS declaration is nothing but an extension of the Know Your Customer (KYC) documents.
7. Documents for FATCA & CRS declarations
All foreign financial institutions in India mandates US persons to submit the following documents:
a. PAN Card
c. Government-issued IDs like Voters ID or Aadhaar
The Government of India will identify the investor as a resident or an NRI on this declaration. Central Board of Direct Taxes (CBDT) will release notifications for all NRI investors on the necessary information.
Tax-evasion is not a problem unique to one country. Therefore, the solutions should be at a global level. The focus is more on the global transparency and consistency of compliance among the registered nations. In essence, FATCA and CRS have indeed gone a long way in reducing tax evasions and non-compliance globally in recent years. Therefore, US individuals, including NRI investors, should be aware of these regulations, especially if they are planning to invest in offshore funds.