India, U.S. Sign FATCA; Pact To Help Detect And Discourage Offshore Tax Evasion

NEW DELHI: India and the United States have inked an accord that will help detect and discourage offshore tax evasion and shield Indian financial entities such as banks, insurance companies, custodians and broking houses from facing penal taxes in the U.S. for failing to disclose the dealings of American citizens and U.S. entities. 

The Foreign Account Tax Compliance Act or FATCA was signed by Revenue Secretary Shaktikanta Das and U.S. Ambassador Richard Verma. 

"FATCA is a mutual effort to combat tax evasion and it would be mutually beneficial for both the countries... FATCA would detect, discourage offshore tax evasion. This kind of exchange of information is top priority for governments," Verma said. 

India has opted to sign inter-governmental agreement with the U.S. under FATCA, which will save financial institutions the bother of inking the agreement individually with the U.S. Talking to the media after signing the agreement, Das said, "We reassured the U.S. government of the binding commitment to...fight the menace of evasion and bring transparency in the matters of payment of taxes which are legitimately due to the government." 

FATCA was enacted by the U.S. in 2010 as part of the Hiring Incentives to Restore Employment Act to combat tax evasion by U.S. nationals holding investments in offshore accounts. The law seeks to facilitate flow of financial information between countries.

Under the inter-governmental agreement, Indian financial institutions will have to reveal information about U.S. tax payers to the revenue department which will be passed on to the U.S. tax authorities. The law also requires foreign financial institutions to report directly to the U.S. Internal Revenue Service details of accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest. Any entity failing to register will face a higher withholding tax rate of 30 percent on payments from all U.S. firms that they deal with. But Indian financial entities will not face this trouble as the government will directly share information with the U.S. authorities. 

The U.S. revenue authorities will in turn provide similar information about Indian account holders in the United States. This automatic exchange of information is scheduled to begin on September 30, 2015. 

"The signing of IGA is a reaffirmation of the shared commitment of India and U.S. towards tax transparency and the fight against offshore tax evasion and avoidance...The agreement underscores growing international cooperation to end tax evasion everywhere," a finance ministry statement said. 

The U.S. has IGAs with more than 110 jurisdictions and is engaged in related discussions with many other jurisdictions. 

FATCA further lends a hand in India's fight against black money. The country has stepped up efforts to tackle the menace by putting in place a new law. It has already inked a multilateral agreement on automatic information exchange and will start receiving information from 2017 onwards. 

Experts said the industry needs to improve its infrastructure. "It is imperative that the industry stakeholders ready themselves for implementing the required infrastructure and processes, which is required to meet the exacting requirements of these regulations," said Himanish Chaudhuri, partner-governance, risk and compliance at KPMG in India. He said while it is expected that there will be operational challenges in the near term, there are definite long term benefits from this system of automatic and periodic exchange of taxpayer information.
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