A FATCA (Foreign Account Tax Compliance Act) / CRS (Common Reporting Standard) declaration was prepared by financial institutions/ intermediaries to comply with the Central Board of Direct Taxes (CBDT) rules.
After signing FATCA agreement with USA and Multilateral Competent Authority Agreement (MCAA) developed by the Organization for Economic Co-operation and Development (OECD) and G20 countries by Indian Government, CBDT issued a notification requiring financial institutions to provide certain financial information of accounts owned by NRIs. Please check my blog analyzing agreements and CBDT notification. FATCA/CRS: Understand How and what Information is gathered and shared with USA and other countries.
Unfortunately, the FATCA/CRS declaration is not common (like KYC – Know Your Client/Customer) or uniform among all financial institutions and investors are required to make the declaration separately for respective institution. E.g. Even if you have invested in mutual funds but in different funds (e.g. Reliance, HDFC, Franklin), you will need to complete 3 FATCA/CRS declarations as the intermediaries (registrars) for all these mutual funds are different (Karvy, CAMS and Franklin respectively).
The form, style, design, requirements may be different in FATCA/CRS declarations of different financial institutions/intermediaries. However, the common required information includes:
- Name and Permanent Account Number (PAN)
- Type of address in KYC
- Place (city/state) of birth, Country of birth and Nationality
- Gross Annual Income or Net worth
- Whether Politically Exposed Person (PEP) or related to PEP
- Whether resident of another country
- Country of Residence, Tax ID number and type. The declaration specifically asks to include USA as country of residence if you are a US citizen or a green card holder, even if you have moved to India and are Indian resident.
The declaration specifically states that it has been issued to comply with the CBDT notified rules 114F-114H and that the relevant information will be reported to tax authorities / appointed agencies or to any institutions for ensuring withholding from the account or any proceeds, i.e. deducting TDS on income or sale amount. Any change in the information is also required to be intimated to the respective financial institute/intermediary within 30 days.
Related important information:
The importance of FATCA/CRS declaration can only be understood in the light of following key points/updates:
- Residential Status: Residential Status is THE MOST IMPORTANT. The whole objective of the FATCA/CRS exercise is to determine the correct residential status. It is important to understand the law relating to residential status in India and foreign county.In India, residential status under Foreign Exchange Management Act (FEMA) and Income Tax Act (ITA) are different and it is possible that a person may be a non-resident under FEMA and a resident under ITA. In foreign country, it is important to understand the difference between residential status for immigration and for income tax purposes.
- Requirement of PAN for investments and taxation: ALL financial transactions – opening bank account, applying for loan or credit card, buying property, buying mutual fund, paying tax, etc. require PAN. All major transactions are also being reported to the Income Tax Department (ITD) on an annual basis. It is almost impossible to do any official transaction without PAN or without notice of the ITD.
- Important updates while filing tax returns in India: Recently, ITD in India has updated the forms for filing income tax return from Financial Year 2014-15. Now, Passport number is required while filing income tax return. In addition, a detailed schedule of foreign assets and related income is also required to be reported. Furthermore, the ITD now requires separate line item for payment to NRI for rent, interest, salary, etc.
- Unique Customer Identification Code (UCIC): RBI has mandated that a unique customer ID is to be allotted to one person (based on PAN) for all accounts with banks, i.e. one ID for checking, savings, Demat, Trading, mutual fund, etc. accounts. Please see my blog on UCID for more details.
- Black Money Act: Indian Government has recently issued Black Money Act (BMA). As per BMA, any unreported asset or income of an Indian resident (even in foreign country) would be considered as Black Money and will be subjected to heavy tax and penalties, including prosecution.
Current Situation / Common Misconceptions:
A lot of NRIs have been maintaining their accounts / assets as residents even if they are not legally required to do so. In addition, they were not declaring these assets or paying taxes in their country of residence. Also, a lot of foreign nationals have moved to India and have become Indian residents but still have been maintaining their accounts and investments as NRIs (e.g. NRE FD).
The non-compliance with FEMA and Income tax laws have become very extensive that even NRIs or returnees didn’t know that it was wrong or against the law. This was mainly due to the ignorance of laws, complete disregard to requirements, wrong advice or greed (not to pay tax).
The five most common misconceptions related to residential status are:
- A foreign citizen living in India is a non-resident.
- An Indian citizen residing abroad on work visa is not a resident of foreign country.
- A PIO with OCI card is an Indian citizen and is considered as a resident of India, even if he is living outside India.
- A US citizen or green card holder living in India is not a US resident.
- It is okay for a non-resident to maintain accounts and assets as resident.
Completing FATCA/CRS Declaration:
Before completing and submitting the FATCA/CRS declaration, please think it through by understanding actual residential status as per ITA and FEMA in India as well as tax laws in country of your residence, reported residential status to all financial accounts/institutions, amount of investments, nature and type of assets, period of holding, your near future plan (moving to India, surrendering foreign residency, etc.), as well as rules, requirements, procedures, penalty for making voluntary disclosure, etc.
My Analysis: Why FATCA/CRS declaration is Important?
After considering 5 key points as explained above with FATCA/CRS declaration as a whole, I think, it will be very difficult for anyone to hide or lie about their correct residential status.
- If an NRI is investing as a resident, Passport detail will reveal the truth about his correct residential status. Also, as a resident, he will be required to report his global income and foreign accounts/assets or will be covered by the Black Money Act.
- If a resident is investing in different residential statuses – Equity shares / Demat account or one bank account as resident and bank FD (NRE) as NRI, the ITD will notice the inconsistency because of common PAN. With implementation of unique ID, it is now not possible to maintain different residential status with same institution.
Currently, the FATCA/CRS declaration is being obtained from NRI account holders only. However, I expect the FATCA/CRS declaration will be required from ALL account holders including residents. And, in case the declaration is not submitted, it is also possible that your any request (adding joint name, change address, issue cheque books, etc.) may be put on hold until you complete and submit the declaration.
Based on the FATCA/CRS declaration, master data of an account will be updated and will be identified as owned by a resident or an NRI. If NRI, the account and related financial information it will be reported as required by CBDT notification.
Please do not take FATCA/CRS declaration lightly. I would recommend contacting your CA or CPA or financial advisor in India as well as in your resident country to understand the implications of FATCA/CRS declaration and plan accordingly.