TaxTMI 
TaxTMI 
TaxTMI 
Guidance Notes on Implementation of Reporting Requirements under Rules 114F to 114H of the Income -Tax Rules
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....mation having to be transmitted "automatically" on yearly basis. The information to be exchanged relates not only to individuals but also to shell companies and trusts having beneficial ownership or interest in the "resident" countries. Further, the reporting needs to be done for a wide range of financial products, by a wide variety of financial institutions, including banks, depository institutions, collective investment vehicles and insurance companies. The Standard and its Commentary are available at http://www.oecd.org/ctp/exchange-of-tax-information/standard-for-automatic-exchange-of-financial-information-in-tax-matters-html. 1.2 Enactment of FATCA and signing of IGA Earlier, in 2010, the USA enacted a law known as FATCA with the objective of tackling tax evasion through obtaining information in respect of offshore financial accounts maintained by USA residents and citizens. The provisions of FATCA essentially provide for 30% withholding tax on US source payments made to Foreign Financial Institutions (FIs) unless they enter into an agreement with the Internal Revenue Service (IRS) to provide information about accounts held with them by USA persons or entities (firms/compani....
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....sis for the Reporting Financial Institutions (RFIs) for maintaining and reporting information about the Reportable Accounts. These Rules have been developed in consultation with Regulators and Financial Institutions in order to smoothen the reporting requirements and to address their concerns wherever possible. A copy of the Notification No. 62 of 2015 modifying the Income-tax Rules, 1962. is at http://www.incometaxindia.gov.in/communications/notification/notification%20no.%2062%20dated%2007-08-2015.pdf. 1.5 Purpose of the Guidance Note The purpose of this Guidance Note is to provide guidance to the Financial Institutions. Regulators and officers of the Tax Department for ensuring compliance with the reporting requirements provided in Rules 114F to 114H and Form 61B of the Income-tax Rules, 1962. The Guidance Note is intended to explain the complex reporting requirements and provide further guidance wherever required. Since a large part of the Rules is based on CRS on AEOI, the Financial Institutions may refer the CRS and its Commentary to get further understanding of the terms used. In this Guidance Note, reference to the CRS and Commentary has been given for further reference. ....
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.... central securities depositories, would generally be considered Custodial Institutions. (Ref: Page 44 of CRS and 160 of Commentary) 2.3.2 Depository Institution Explanation (b) to Rule 114F(3) defines a "depository institution" to mean any entity that accepts deposits in the ordinary course of a banking or similar business. An Entity is considered to be engaged in a "banking or similar business" if, in the ordinary course of its business with customers, the Entity accepts deposits or other similar investments of funds and regularly engages in one or more of the following activities : (a) makes personal, mortgage, industrial, or other loans or provides other extensions of credit; (b) purchases, sells, discounts, or negotiates accounts receivable, instalment obligations, notes, drafts, cheques, bills of exchange, acceptances, or other evidences of indebtedness; (c) issues letters of credit and negotiates drafts drawn thereunder; (d) provides trust or fiduciary services; (e) finances foreign exchange transactions; or (f) enters into, purchases, or disposes of finance leases or leased assets. Savings banks, commercial banks, savings and loan associations, and credit uni....
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....t. In the case of Trusts, the reporting requirement is on the Trustees resident in India, unless the required information is being reported elsewhere because the trust is treated as resident there. (Ref: Page 44 of CRS and 158 of Commentary) 2.5 Step 4: Is the Financial Institution a Non-Reporting Financial Institution? Rule 114F(5) specifies a number of entities as non-reporting financial institutions and these entities are not required to maintain or report the information, except in case of "financial institution with a local client base" in certain specified situations. These non-reporting financial institutions are as under : (a) a Governmental entity, International Organisation or Central Bank; (b) a Treaty Qualified Retirement Fund; a Broad Participation Retirement Fund; a Narrow Participation Retirement fund; or a Pension Fund of a Governmental entity, International Organization or Central bank; (c) a Non-public fund of the armed forces. Employees' State Insurance Fund, a gratuity fund or a provident fund; (d) an entity that is an Indian financial institution only because it is an investment entity. provided that each direct holder of an equity interest in th....
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....ancial Institution and includes specific categories of accounts (Depository Accounts, Custodial Accounts, Equity and debt interests. Cash Value Insurance Contracts and Annuity Contracts). Certain types of Financial Accounts which carry low risk of being used to evade tax are excluded from needing to be reviewed or reported and are called Excluded Accounts. 3.2 Categories of Financial Accounts Rule 114F (1) defines "Financial Accounts" to include the following (a) "depository account" which includes any commercial, checking, savings, time, or thrift account, or an account that is evidenced by a certificate of deposit, thrift certificate, investment certificate, certificate of indebtedness, or other similar instrument maintained by a financial institution in the ordinary course of a banking or similar business and also an amount held by an insurance company pursuant to a guaranteed investment contract or similar agreement to pay or credit interest thereon. (b) "custodial account" which means an account (other than an insurance contract or annuity contract) for the benefit of another person that holds one or more financial assets (c) in the case of an investment entity, any eq....
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....on to those accounts must be reported. In general terms, a Reportable Account means an account, which has been identified pursuant to the due diligence procedure prescribed in Rule 114H, as held by one or more Reportable Persons or by a Passive Non-Financial Entity with one or more Controlling Persons that is a Reportable Person. Thus, an account can be Reportable Account by virtue of the Account Holder or by virtue of the Account Holders' Controlling Persons. 4.2 Reportable Accounts by virtue of the Account Holder Rule 114F(6)(a) states that "reportable account" is a financial account, which has been identified, pursuant to the due diligence procedures prescribed in Rule 114H, as held by a "reportable person". The reportable person as defined in Rule 114F(8) means : (a) One or more specified U.S. persons (b) One or more persons that is resident of any country or territory outside India under the tax laws of such country or territory other than prescribed entities The U.S. person includes an individual being a citizen or resident of USA, a partnership or corporation organized in the USA, US trusts etc. In ease of USA, an individual account holder who is a citizen or resi....
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....neficial owner as determined under sub-rule (3) of rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005. It has been specified that in determining the beneficial owner, the procedure specified in the following circular as amended from time to time shall be applied, namely:- (i) DBOD.AML.BC. No. 71/14.01.001/2012-13, issued on the 18th January, 2013 by the Reserve Bank of India; or (ii) CIR/MIRSD/2/2013, issued on the 24th January, 2013 by the Securities and Exchange Board of India; or (iii) IRDA/SDD/GLD/CIR/019/02/2013, issued on the 4th February, 2013 by the Insurance Regulatory and Development Authority. It has also been specified that in the case of a trust, the controlling person means the settlor, the trustees, the protector (if any), the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust, and in the case of a legal arrangement other than a trust, the said expression means the person in equivalent or similar position. 4.3.6 Thus, if the Controlling Persons of a Passive NFE having an account in a Reporting Financial Institution, is a person resident of a country/territor....
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....r of entry into force of the IGA, i.e., by 31st August, 2016 and if it is not obtained, the accounts need to be closed. 5.3 Due Diligence for Pre-existing Individual Accounts 5.3.1 The following pre-existing individual accounts are not required to be reviewed or reported: In case of US reportable accounts [Rule 114H (3)(a)(i)] * where the balance or value as on 30th June, 2014 does not exceed an amount equivalent to US$ 50,000 * which is a cash value insurance contract or an annuity contract, the balance or value does not exceed an amount equivalent to US$ 2,50,000 as on 30th June, 2014 * which is a cash value insurance contract or an annuity contract, the reporting financial institution, under any other law for the time being in force in India or of the USA, is prevented from selling such contract to a person who is resident of the USA. In case of other reportable accounts [Rule 114H(3)(a)(ii)] * which is a cash value insurance contract or an annuity contract, the reporting financial institution, under any other law for the time being in force in India, is prevented from selling such contract to a person who is not a resident of India for tax purposes. 5.3.2 There are....
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....ue pre-existing individual accounts, it would not be reportable if the Reporting Financial Institution obtains and maintains a record of * a self-certification from the account holder that it is not resident of a country/territory outside India. * documentary evidence establishing the account holder's non-reportable status. 5.3.5 The due diligence procedure for high value pre-existing individual accounts is prescribed in Rule 114H(3)(c) which provides for enhanced review procedures described below: (a) If the electronic searchable information in case of a customer includes the following information, no paper record search is required * the account holder's residence status for tax purposes; * the account holder's residence address and mailing address currently on file with the reporting financial institution; * the account holder's telephone number or numbers currently on file, if any, with the reporting financial institution; * in the case of financial accounts other than depository accounts, whether there are standing instructions to transfer funds in the account to another account (including an account at another branch of the reporting financial i....
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....l accounts that a relationship manager knows, or has reason to know, are directly or indirectly owned, controlled, or established (other than in a fiduciary capacity) by the same person, [Rule 114H(7)(c)] 5.3.7 The timeline for reviewing of the pre-existing individual accounts have been provided in Rule 114H(3)(d) as under:- (i) in case of a U.S. reportable account which is high value account as on the 30.6.2014, shall be completed by the 31.12.2015 and if based on this review such account is identified as a U.S. reportable account after 31.12.2014 but before 31.12.2015 the reporting financial institution is not required to report information about such account with respect to calendar year 2014, but shall report information about the account on an annual basis thereafter. (ii) in case of a U.S. reportable account which is low value account as on the 30.6.2014 shall be completed by the 30.6.2016. (iii) in case of other reportable account which is high value account as on the 31.12.2015 shall be completed by the 30.6.2016. (iv) in case of other reportable accounts that is low value account as on the 31.12.2015, must be completed by the 30.6.2017. (Ref: Page 31 of CRS and 1....
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....to an IGA with USA (a partner jurisdiction FI) but has neither registered with US IRS and obtained a GIIN nor it is a Non-Reporting FI (NRFI). 5.4.5 The Reporting Financial Institution also needs to determine whether the account holder is a Passive NFE and whether its controlling persons are residents of countries/territories outside India as per the following procedure: * for purposes of determining whether the account holder is a passive NFE, the reporting financial institution shall obtain a self-certification from the account holder to establish its status, unless it has information in its possession or which is publicly available, based on which it can reasonably determine that the account holder is an active NFE or a financial institution other than an investment entity. * for purposes of determining the controlling persons of an account holder, a reporting financial institution may rely on information collected and maintained in accordance with the rules made under the Prevention of Money-laundering Act, 2002 if the balance does not exceed USD 10,000,00. If it exceeds USD 10,000,00. self-certification from the account holder or such controlling person(s) will be require....
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....n, to determine the account holder's residence or residences for tax purposes. The Reporting Financial Institution must also confirm the reasonableness of such self-certification based on the information obtained by it in connection with the opening of the account, including any documentation collected in accordance with Prevention of Money-laundering (Maintenance of Records) Rules, 2005. 5.5.3 Where the self-certification establishes that the account holder is resident for tax purposes in a country or territory outside India, the reporting financial institution shall treat the account as a reportable account and the self-certification shall also include the account holder's taxpayer identification number with respect to such country or territory outside India and date of birth, 5.5.4 Where a self-certification has been obtained for a new individual account and if there is a change of circumstances with respect to such account which causes the reporting financial institution to know, or have reason to know, that the said self-certification is incorrect or unreliable, the reporting financial institution shall not rely on the said self-certification and shall obtain a valid....
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....r or such controlling person. 5.6.4 The RFI is also required to determine whether the account holder is a non-participating financial institution and those accounts should be treated as US reportable accounts to be reported to USA for calendar years 2015 and 2016. (Ref: Page 40 of CRS and 143 of Commentary) 5.7 Alternate Procedure in case of US Reportable Accounts 5.7.1 In the case of US Reportable Accounts, the due diligence procedure for new-accounts, including obtaining a self-certification from the account holder, would apply from 1st July, 2014. However, the legal basis for having this due diligence procedure for new accounts was introduced only on 7th August, 2015, on Notification of Rules 114F to 114H, the IGA between India and USA provides for an alternative procedures for applying the due diligence procedure which has been included in Rule 114H(8) of the Rules. 5.7.2 As provided in Proviso to Rule 114H(8), all the new entity accounts which are U.S. reportable accounts opened from 1st July, 2014 to 31st December, 2014, may be treated by the RFI as pre-existing entity account and apply the due diligence procedure related to pre-existing accounts without regard to accoun....
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....hose cases where after indicia search a positive match is found with any of the U.S. indicia. If a self-certification is not provided by an account holder or the reasonableness of a self-certification cannot be confirmed, the account is reportable. 5.7.7 For new individual accounts (depository or cash value contract) accounts opened after 1.9.2015, the alternate procedure will not be applicable and the due diligence procedure as applicable to "new accounts" including obtaining and verification of self-certification will be applicable. In case of accounts which arc not required to be reviewed or reported as per Rule 114H(4)(a), a value search should be carried out as on 31.12.2015, the due diligence for new accounts, including obtaining of self-certification, needs to be carried out only in those cases where the value exceeds US$ 50,000. Such due diligence needs to be completed within a period of 90 days from the end of calendar year 2015, i.e., by 31.3.2016. In case of other than depository or cash value contract accounts, the financial institutions should make reasonable efforts to obtain the self-certification by 31.12.2015, particularly in those cases where after indicia search....
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....t to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year; and (ii) the total gross proceeds from the sale or redemption of financial assets paid or credited to the account during the calendar year with respect to which the reporting financial institution acted as a custodian, broker, nominee, or otherwise as an agent for the account holder; (f) in the case of any depository account, the total gross amount of interest paid or credited to the account during the relevant calendar year; (g) in the case of any account other than custodial or depository accounts, including accounts held by investment entities and cash value insurance contract and annuity, the total gross amount paid or credited to the account holder with respect to the account during the relevant calendar year with respect to which the reporting financial institution is the obligor or debtor, including the aggregate amount of any redemption payments made to the account holder during the relevant calendar year; and (h) in the case of any account held by a non-participating financial institution, for the calendar years 2015 and 2016,....
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....h value or change the beneficiary of the contract and if no person can access the cash value or change the beneficiary, the account holder is any person named as the owner in the contract and any person with a vested entitlement to payment under the terms of the contract; (c) "taxpayer identification number" means a number assigned to a person in the country or territory in which he is resident for tax purposes and includes a functional equivalent in case no such number is assigned. (d) Where the person is a resident of more than one country or territory outside India under the tax laws of such country or territory, the reporting financial institution shall maintain the taxpayer identification number in respect of each such country or territory. (e) In case of pre-existing accounts, the taxpayer identification number or date of birth is not required to be reported if such taxpayer identification number or date of birth is not in the records of the reporting financial institution. However, the RFI need to obtain the taxpayer identification number and date of birth with respect to pre-existing accounts by the 31st December, 2016 and shall report it with respect to calendar year....
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....to pre-existing accounts and new accounts. The declaration is required to be submitted using a Digital Signature Certificate. (d) In case if the designated director (as reported in registration details submitted by the RFI) is same as the person authorized to verify the return of income of the reporting financial institution as per the provisions of section 140 of the Income-tax Act, 1961, the Form 61B or Nil statement is required to be submitted with the digital signature certificate of the person authorized to sign the return of income of the RFI. In other cases, the necessary facilities are being developed to enable filing of statement by designated directors who are not authorized to sign the return of income. 8. Monitoring and Compliance 8.1 By Income-tax Department As provided in Rule 114G(9), the statement needs to be furnished to the Directorate of Intelligence and Criminal Investigation and the said Directorate has been given the responsibility of ensuring the compliance. The penalty provisions provided in the Income-tax Act, 1961, are as under : (a) Section 271 FA of the Income-tax Act, 1961 (i) For failure to furnish the statement of reportable account with....
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.... Joint Secretary (FT&TR-I). [email protected] Mr. Rahul Navin, Director (FT&TR-III), [email protected] Mr. Gaurav Sharma, US (FT&TR-III)(l), [email protected] (b) For Systems related Queries Mr. Sanjeev Singh, ADG (Systems-II)), [email protected] Mr. Vipul Agarwal, JDIT (Systems), [email protected] (Mr. Gaurav Sharma) Under Secretary (FT&TR-III)(l)] [email protected] Annexure: Jurisdictions committed to implement AEOI in accordance with CRS and signatories of MCAA SI. No. Name of the Jurisdiction Whether joined MCAA First Exchange by 2017 1. Anguilla Yes 2. Argentina Yes 3. Barbados No 4. Belgium Yes 5. Bermuda Yes 6. British Virgin Islands Yes 7. Bulgaria No 8. Cayman Islands Yes 9. Chile Yes 10. Colombia Yes 11. Croatia Yes 12. Curacao Yes 13. Cyprus Yes 14. Czech Republic Yes 15. Denmark Yes 16. Dominica No 17. Estonia Yes 18. Faroe Islands Yes 19. Finland Yes 20. France Yes 21. Germany Yes 22. Gibraltar Yes 23. Greece Yes 24. Greenland No 25. Guernsey Yes 26. Hungary Yes 27. Iceland Yes 28. India Yes 29. Ireland Yes 30. Isle of Man Yes 31. Italy Yes 32....