FATCA & CRS fight tax evasion, but who's targeted? Unmask the differences & stay compliant across borders.
To crack down on tax evasion by U.S. citizens hiding assets abroad, the U.S. passed the Foreign Account Tax Compliance Act (FATCA) in 2010. This law imposes a hefty 30% withholding tax on U.S. income paid to foreign banks unless they agree to share information about accounts held by Americans or U.S.-controlled entities. Since sharing such data directly with the U.S. might conflict with local laws in some countries, like India, the U.S. has opted for intergovernmental agreements (IGAs).
On July 9, 2015, India and the U.S. signed an IGA. Under this agreement, Indian financial institutions will report required information about U.S. account holders to Indian tax authorities, who will then transmit it to the U.S. on a regular basis. The IGA also ensures reciprocal information sharing, meaning the U.S. will provide India with information about Indian citizens holding financial assets in the U.S.
List of Abbreviations
| Abbreviation | Meaning | Description |
| AEOI | Automatic Exchange of Information | Global framework for automatic exchange of financial information between tax authorities. |
| CBDT | Central Board of Direct Taxes | India’s primary tax authority responsible for direct taxes. |
| CRS | Common Reporting Standard | OECD standard for automatic exchange of information on financial accounts. |
| DTAA | Double Taxation Avoidance Agreement | Treaty between countries to avoid double taxation on income. |
| EOI | Exchange of Information | Process of sharing financial information between tax authorities. |
| FATCA | Foreign Account Tax Compliance Act | US law requiring foreign institutions to report accounts held by US taxpayers. |
| FI | Financial Institution | Entities providing financial services like banks, investment firms, insurance companies. |
| FATF | Financial Action Task Force | Intergovernmental body promoting financial action against money laundering and terrorist financing. |
| FT&TR | Foreign Tax & Tax Research | Area of legal practice focusing on international tax issues. |
| Global Forum | Global Forum on Transparency and Exchange of Information for Tax Purposes | OECD body leading implementation of AEOI standards. |
| I&CI | Intelligence & Criminal Investigation | Unit within CBDT responsible for investigations and intelligence gathering. |
| Income-tax Act | Income-tax Act, 1961 | Primary legislation governing income tax in India. |
| KYC/AML | Know Your Customer/Anti Money Laundering | Compliance procedures to verify customer identity and prevent financial crime. |
| MCAA | Multilateral Competent Authority Agreement | OECD multilateral instrument facilitating automatic exchange of tax information. |
| NFE | Non-Financial Entity | Entities not considered FIs, but may still be subject to AEOI reporting. |
| PMLA | Prevention of Money Laundering Act 2002 | India’s law for preventing money laundering and financing of terrorism. |
| RBI | Reserve Bank of India | India’s central bank responsible for regulating financial institutions. |
| RFI | Reporting Financial Institution | FI required to report information under AEOI or FATCA. |
| Rule | Income-tax Rules, 1962 | Rules issued by CBDT to administer the Income-tax Act. |
| SEBI | Securities and Exchange Board of India | India’s regulator for the securities market. |
| TPL | Tax Policy and Legislation | Division within CBDT responsible for formulating tax policy and legislation. |
Both FATCA and CRS are international agreements aimed at promoting tax transparency and combating tax evasion by:
FATCA (Foreign Account Tax Compliance Act)
- Focus: Primarily designed by the US to target American taxpayers hiding financial assets in foreign accounts.
- Mechanism: US imposes a 30% withholding tax on US-source income paid to foreign financial institutions (FFIs) unless they agree to share information about accounts held by US citizens and entities.
- Implementation: Achieved through bilateral agreements (IGAs) between the US and individual countries.
CRS (Common Reporting Standard)
- Focus: Global standard adopted by over 100 countries, including India, to exchange financial information automatically.
- Mechanism: Requires FFIs in participating countries to collect and report information about account holders resident in other participating countries.
- Implementation: Standardized protocol for automatic exchange of information between tax authorities.
Similarities
- Both aim to prevent tax evasion by tracking financial accounts held by residents of another jurisdiction.
- Both require reporting by FFIs on accounts held by certain individuals and entities.
- Both involve automatic exchange of information between tax authorities.
Differences
- Target: FATCA focuses on US taxpayers, while CRS applies to taxpayers of all participating countries.
- Implementation: FATCA uses bilateral agreements, while CRS uses a single multilateral standard.
- Scope: FATCA primarily covers income-generating accounts, while CRS covers a wider range of financial products.
Compliance
If you hold accounts in participating countries under FATCA or CRS, you may need to provide additional information to your financial institution to ensure compliance. It’s always recommended to consult a tax advisor for specific guidance on your situation.
US-India agreement to implement FATCA
FATCA acts as a global tax watchdog, shaking things up for foreign financial institutions (FFIs). It forces them to upgrade their tax reporting systems, making them more efficient and transparent. This also gives them a chance to build trust with investors and even gain wider recognition in the US market.
To embrace FATCA, India took action in 2014 by adding specific rules and a new form to its Income Tax Act. This paved the way for a 2015 agreement with the US, officially bringing FATCA into play.
Under this agreement, Indian tax authorities can now access specific account information of US investors. This helps ensure US citizens comply with their tax obligations, while giving the US Internal Revenue Service (IRS) a clearer picture of their financial activities. For FFIs, it provides a legal framework for collecting and reporting personal and income details, keeping everything above board.
FATCA declaration for NRIs
Starting from January 2016, all Indian and NRI investors, both existing and new, must actively submit a FATCA self-declaration. Although the specifics may vary slightly among different financial institutions, the required standard information is as follows:
- Name
- Permanent Account Number (PAN)
- Address
- Place (city/state) of birth
- Country of birth
- Nationality
- Gross Annual Income
- Occupation
- Whether the resident of another country? If yes, then the country of residence, Tax ID number, and type
The declaration explicitly mandates the inclusion of the USA as a country of residence if you are a US citizen or a green cardholder, even if you have relocated to India and are now an Indian resident. Additionally, the declaration clarifies that the Central Board of Direct Taxes (CBDT) has already addressed this requirement in rules 114F-114H.
Common Reporting Standard or CRS
Global tax transparency gets a boost with the Common Reporting Standard (CRS)! Developed by the OECD, this agreement compels financial institutions worldwide to share information about their customers’ wealth overseas with the relevant tax authorities. This means governments can finally shine a light on their citizens’ hidden assets abroad, ensuring everyone plays fair when it comes to taxes.
Over 90 countries, including India, have signed on to this global standard. This means if an Indian resident has stashed cash in a foreign bank account, the Indian authorities can now get their hands on that information through an automatic exchange with the foreign bank’s country. This is all thanks to Article 6 of the Mutual Administrative Assistance in Tax Matters under the CRS.
CRS Declaration
While FATCA hunts down hidden accounts for US citizens, CRS casts a wider net for over 90 countries. Both ask similar questions about your offshore mutual fund holdings, but CRS reaches far beyond US borders.
Downloading the CRS self-declaration form is easy. Check your offshore fund website, visit their service centers, or head to the Asset Management Company’s office. You can then submit it online or offline at any fund house branch, with companies like CAMS offering online help. Completing the registration is smooth – just enter the OTP sent to your PAN number. Think of CRS as an extension of your KYC paperwork, shining a light on your global financial footprint.
Documents for FATCA & CRS declarations
US persons investing in foreign financial institutions in India are required to submit the following documents:
- PAN Card
- Passport
- Government-issued IDs like Voters ID or Aadhaar
On this declaration, the Government of India will determine the investor’s status as a resident or an NRI. The Central Board of Direct Taxes (CBDT) will issue notifications to all NRI investors regarding the necessary information. Tax evasion is a challenge not limited to a single country.
Hence, solutions should be implemented on a global scale. The emphasis is placed on worldwide transparency and the uniformity of compliance across registered nations. Essentially, FATCA and CRS have significantly contributed to reducing tax evasions and non-compliance on a global scale in recent years.
Therefore, US individuals, including NRI investors, need to be well-informed about these regulations, particularly if they intend to invest in offshore funds.
FAQs
What is FATCA compliance, and how does it differ from CRS compliance?
FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) are both international initiatives designed to combat tax evasion. FATCA is a U.S. law that requires foreign financial institutions to report financial accounts held by U.S. taxpayers, while CRS is a global standard developed by the OECD for the automatic exchange of financial account information.
Who is affected by FATCA, and who falls under CRS compliance?
FATCA primarily affects U.S. taxpayers holding financial accounts abroad and foreign financial institutions interacting with these individuals. In contrast, CRS impacts tax residents of participating jurisdictions, requiring financial institutions to report account information to the tax authorities of the account holder's country of residence.
What types of information are reported under FATCA and CRS compliance?
Under FATCA, financial institutions report details such as account balances, interest, dividends, and certain capital gains. For CRS compliance, information reported includes account balances, interest, dividends, income from certain insurance products, and proceeds from the sale of financial assets.
Are there differences in reporting timelines between FATCA and CRS?
Yes, there are variations. FATCA generally has an annual reporting requirement, while CRS reporting can also be annual but may differ depending on the jurisdiction. It's essential to be aware of the specific reporting timelines applicable to each compliance framework.
Do all countries participate in both FATCA and CRS compliance?
While FATCA has a broad global impact due to the extraterritorial reach of U.S. tax law, CRS is a multilateral initiative with over 100 jurisdictions participating. However, not all countries are part of either system, and the extent of participation can vary.
How can businesses ensure compliance with both FATCA and CRS requirements?
Businesses should implement robust due diligence processes, maintain accurate records, and stay informed about the evolving regulatory landscape. Seeking professional advice and leveraging automated reporting systems can streamline compliance efforts for both FATCA and CRS.
What are the penalties for non-compliance with FATCA and CRS regulations?
Penalties for non-compliance can vary by jurisdiction. FATCA may impose withholding taxes on non-compliant institutions, while CRS penalties may include financial penalties and reputational risks. It is crucial for businesses to understand and adhere to the specific consequences outlined in each regulatory framework.
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