In a Historical turn of events, India has reached FATCA agreement in
substance with the USA and has consented to be included in the list of
jurisdictions that are treated as having a Inter-Governmental Agreement (IGA)
under Model-1 with an effective date of April 11, 2014..…THIS IS HUGE….I have been
telling since last 1 year AND FIRST TO POST it on this BLOG as
it is NOT in the news yet……
I have seen increased interest in NRIs to understand the Foreign Account Tax Compliance Act (FATCA)
rules and regulations of USA. However, very few (less than 5%) of US based NRIs are serious or showing an interest to learn or comply with FATCA. The deadline is approaching very fast, currently June 30, 2014. Believe me, USA is very serious about its implementation. FATCA is here to stay and if NRIs from USA are not prepared now, it is going to hit them before they know it.
I apologize that the blog is twice as long but I wanted to have EVERYTHING – ALL there is to know – about FATCA for NRIs for better understanding and compliance in one blog. You may also refer my other blogs on FATCA for details: FATCA is coming; Start Planning and What to expect from bilateral FATCA Agreement between USA and India.
1. Brief Background/History:
Before you know why FATCA is here to stay or why I think India will sign the FATCA, it is very critical to understand the background/history of the US tax system and the importance of offshore account compliance, FATCA and agreement with India to the USA.
(i) US Tax System: Any income sourced in the USA is reported to IRS and to the tax payer who in turn disclose the same for in his 1040 as his income. Any income that is not sourced in the USA, IRS rely (trust) the residents/citizens to honestly declare the income, source and voluntarily pay the tax. How many do that?
(ii) What if no income?: Now, what if you have $100 million in a Swiss account but not generate any income? To monitor or track such transactions or accounts, Reporting of Foreign Financial Accounts (FBAR) was introduced, wherein you would report your foreign financial accounts if the balance in the account exceeded US $ 10,000. For more on FBAR requirement and compliance, please refer to my three blogs at Understanding and Complying with FBAR, Foreign Financial Accounts-whether reportable and Required Information for compliance with FBAR.
(iii) FBAR penalty: The form TD 90-22.1 (FBAR) is to be filed by June 30 of next year with the Department of Treasury and NO extension is allowed. If you are not sure, file the form and later revise the same but you must file the FBAR form. Also, for non-filing, severe penalty – 50% of balance or $100,000, whichever is higher and criminal prosecution. Also, the penalty is per year. So if you have $1,000,000 in a bank account for 5 years, you would end up paying $2,500,000 in penalty and could also go to jail.
(iv) Non-Filing: Now, if you didn’t know about the requirement or did not comply for say 2-3 years, you may not start complying thereafter. While there is no tax or penalty had you done it from start but because you didn’t, you may think why bother now as the penalty, if caught, is way more than the balance now. On the other hand, while many offshore accounts were presumably open for decades, practical reasons prevented IRS from auditing and collecting unpaid taxes from all of those years.
Furthermore, during the financial crisis of 2008-09 and thereafter, all countries, including USA were trying to increase the revenue. During the period, many money laundering schemes/ scandals were exposed, two mostly publicized being UBS (overall) and HSBC (for NRIs). IRS realized that while the FBAR requirement is there, it is not being implemented so they saw the potential.
(v) UBS and HSBC cases: UBS and HSBC both banks accepted that they were involved in practices of money laundering, intentionally circumventing the laws, or not reporting of accounts or financial transactions. Both banks paid huge fines, promised not to solicit US residents’ investments abroad AND declared information about the account holders to the IRS. Can you believe when I tell you that, the UBS banker, who was one of the accused and went to prison after telling IRS, received US$ 104 million reward, HIGHEST in US History, under the whistleblower program? Just imagine how serious USA is.
(vi) Overseas Voluntary Compliance/Disclosure Program/Initiative (OVCI/ OVDP/OVDI/OVDP): Four Offshore Voluntary disclosure/compliance program/initiatives have been issued by the IRS in 2003, 2009, 2011 and 2012. While the 2003, 2009, and 2011 programs had a specified period to join, the 2012 program is, at present, open ended. The reason for the 2003 program was information shared by promoters who used offshore bank card to access hidden offshore income. The main reason for 2009 program was the summons for UBS Bank and 2011 program was the summons for HSBC and other foreign banks. The reason for 2012 Offshore Voluntary Disclosure Program is the FATCA and increased actions against a number of foreign financial institutions. And, it is a great source of revenue for the USA.
As per the program, US person is to disclose all the foreign financial account and related income, revise all previous years’ tax returns, pay tax, interest, penalty as well as pay FBAR penalty based on the highest balance in foreign financial accounts. While there was no offshore penalty in 2003 program, the offshore penalty on the highest balance was 20%, 25%, 27.5% for 2009, 2011 and 2012 programs respectively.
NRIs, who had not filed FBAR or voluntarily disclosed the foreign assets had to face severe consequences in terms of paying back taxes, huge penalties and also went to jail.
(vii) GAO Report: As per the GAO report of March 2013, IRS has collected about $5.7 Billion from 34,000 delinquent US persons as of December 31, 2012. Out of which $4.1 Billion is from OVDI 2009 and $1.4 Billion from OVDI 2011 programs. As all cases not completed as of December 31,2012 the collection, which already is a significant amount, is expected to increase.
As per the January 6, 2014 GAO letter regarding locations of the foreign bank accounts in OVDP 2009, India has the 10th highest accounts as per the FBAR forms with Switzerland in the top spot with 42% of accounts (UBS is a Swiss bank). With HSBC and India being the main factors for OVDI 2011, India could be in top 3 countries with number of offshore accounts and may be top 5 overall in all the programs. This shows India’s prominence in offshore accounts.
2. FATCA:
Foreign Account Tax Compliance Act (FATCA) was enacted by the US in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act to combat tax evasion by US nationals holding investments in foreign accounts. The objective of FATCA is the Reporting of Foreign Financial Assets (FFA) to IRS.
The reporting objective of Foreign Financial Account under FATCA is two-fold. The US tax payers report foreign financial assets and income in Form 8938 to IRS and Foreign Financial Institutions (FFI) to report certain information to IRS in the same manner any US Financial Institution reports to IRS.
Following the enactment of FATCA, Treasury published the Model Inter Governmental Agreement (IGA) for simplified reporting wherein the country would enter into a FATCA agreement with USA either providing combined information of all FFI (e.g. RBI in India) or allowing respective FFI directly report to IRS (e.g. SBI).
Requirement for Form 8938 was introduced from calendar year 2011 tax return and is required if the US person (filing as Single) has Foreign Financial Assets above US $ 50,000 at year end or US $ 75,000 at any time during the year and US $ 200,000 at year end or US $ 300,000 for individuals living in USA or abroad respectively. The limits are doubled for married filing jointly taxpayers.
FFI reporting to IRS was originally effective from January 1, 2014. Look at the planning…3-4 years in advance. While Form 8938 was effective as planned from calendar year 2011, convincing all other countries having different laws and legal system in different geographies and language, having different culture and banking laws is a unimaginably challenging task. So while it was planned to be effective from January 1, 2014 with pre-existing account analysis date of December 31, 2013, it is just been delayed by 6 months to June 30, 2014.
3. FATCA Update:
On November 8, 2012, USA identified 50 countries and jurisdictions with which they want to enter the FATCA agreement for sharing of financial information. As of March 11, 2014, FATCA agreements have been signed with 25 countries.
The countries include major developed countries such as UK, Japan, Germany, France, Italy, Canada, Norway, Denmark, Finland, Netherlands; tax heaven countries such as Switzerland, Isle of Man, Cayman Islands, Guernsey, Jersey, Malta, Bermuda, Mauritius and other countries such as Chile, Hungary, Spain, Costa Rica, Ireland and Mexico. Also, while an Agreement with Australia is not currently available on the FATCA website, news reports already mentioned that Australia signed the FATCA agreement at the time of hosting G20 summit in February 2014.
So there are only 25 countries to go, including India to enter FATCA agreement by June 30, 2014.
4. US – India FATCA Agreement Update:
On November 8, 2012, USA identified India as one of the 50 countries or jurisdictions for FATCA agreement. At that time, USA has been working with India to explore options for intergovernmental engagement. Since then, a lot of progress has been made.
It started in October 2012 with then US Treasury Secretary Tim Geithner and then US Fed Chairman Ben Bernanke meeting with Prime Minister Dr. Manmohan Singh and India’s Finance Minister P. Chidambaram. Since then, there has been lot of dialogue continued between two countries. By November 2013, the Finance Ministry had asked RBI and SEBI’s views and suggestions on the proposed FATCA agreement. SEBI in turn had also met with Mutual Fund Houses, Foreign Institutional Investors (FII) and the brokers regarding FATCA.
Officials from the RBI, SEBI and the Income-Tax department have traveled to the USA and held consultations with their counterparts to finalize the framework. A team of the US Treasury officials also met Indian Income Tax and CBDT officials and are negotiating an Inter-Governmental Agreement (IGA) between two countries.
The Department of Treasury has already added India as one of the jurisdictions that have reached agreements in substance and have consented to being included in the list as Model 1 IGA beginning from April 11, 2014. Please click here for the link to Treasury’s website. I think the USA-India FATCA agreement will soon be a reality.
5. What a typical NRI thinks:
After talking or giving consulting to a lot of NRIs, what I learnt is that 95%+ NRIs are not serious about FATCA. In spite of having lived in the USA, they still think as an Indian that it would not affect them and are still in the denial. I have listed below TOP 10 common defenses (excuses):
The question should not be “What if”; it should be “When”. I expect India to sign Model 1 agreement wherein RBI and not individual bank will report the transactions to IRS.
When India signs the FATCA agreement and RBI reports to IRS,
In Short, IF YOU OWNED ANY FINANCIAL ACCOUNT ON JUNE 30, 2014, EVERYTHING WILL BE REPORTED IF YOU MEET THE CRITERIA.
7. TWO IMPORTANT THOUGHTS TO PONDER:
A. NOTHING will happen NOW as the deadline for identifying and reporting of pre-existing accounts is June 30, 2016, which may be extended. Once USA gets all these data, a special team will analyze it for let’s say 6-12 months or more and then start issuing notices. So, you may not get a notice from IRS until 2017 or 2018. While you are happy giving your examples to your friends that you did not disclose or report or were not proactive and still nothing happened to you in 2014, 2015 or 2016 but it will hit you later.
B. You wouldn’t be a “US person”, if you don’t know how strict and sincere USA is about laws and to what extent they can go for compliance. USA is NO India when it comes to legal system and compliance. In India, the VDIS (Voluntary Disclosure of Income Schemes) have tax of 30% for any versions and no penalty; whereas under OVDI/OVDP, not only you pay tax, interest and penalty, the penalty also increases in later versions (20% à 25% à 27.5%), rewarding anyone who came early. And, even after paying big shot lawyers and paying taxes and huge penalties (in million $s), NRIs have also gone to jail for FBAR violations in the USA.
8. My Advice:
I have seen increased interest in NRIs to understand the Foreign Account Tax Compliance Act (FATCA)
rules and regulations of USA. However, very few (less than 5%) of US based NRIs are serious or showing an interest to learn or comply with FATCA. The deadline is approaching very fast, currently June 30, 2014. Believe me, USA is very serious about its implementation. FATCA is here to stay and if NRIs from USA are not prepared now, it is going to hit them before they know it.
I apologize that the blog is twice as long but I wanted to have EVERYTHING – ALL there is to know – about FATCA for NRIs for better understanding and compliance in one blog. You may also refer my other blogs on FATCA for details: FATCA is coming; Start Planning and What to expect from bilateral FATCA Agreement between USA and India.
1. Brief Background/History:
Before you know why FATCA is here to stay or why I think India will sign the FATCA, it is very critical to understand the background/history of the US tax system and the importance of offshore account compliance, FATCA and agreement with India to the USA.
(i) US Tax System: Any income sourced in the USA is reported to IRS and to the tax payer who in turn disclose the same for in his 1040 as his income. Any income that is not sourced in the USA, IRS rely (trust) the residents/citizens to honestly declare the income, source and voluntarily pay the tax. How many do that?
(ii) What if no income?: Now, what if you have $100 million in a Swiss account but not generate any income? To monitor or track such transactions or accounts, Reporting of Foreign Financial Accounts (FBAR) was introduced, wherein you would report your foreign financial accounts if the balance in the account exceeded US $ 10,000. For more on FBAR requirement and compliance, please refer to my three blogs at Understanding and Complying with FBAR, Foreign Financial Accounts-whether reportable and Required Information for compliance with FBAR.
(iii) FBAR penalty: The form TD 90-22.1 (FBAR) is to be filed by June 30 of next year with the Department of Treasury and NO extension is allowed. If you are not sure, file the form and later revise the same but you must file the FBAR form. Also, for non-filing, severe penalty – 50% of balance or $100,000, whichever is higher and criminal prosecution. Also, the penalty is per year. So if you have $1,000,000 in a bank account for 5 years, you would end up paying $2,500,000 in penalty and could also go to jail.
(iv) Non-Filing: Now, if you didn’t know about the requirement or did not comply for say 2-3 years, you may not start complying thereafter. While there is no tax or penalty had you done it from start but because you didn’t, you may think why bother now as the penalty, if caught, is way more than the balance now. On the other hand, while many offshore accounts were presumably open for decades, practical reasons prevented IRS from auditing and collecting unpaid taxes from all of those years.
Furthermore, during the financial crisis of 2008-09 and thereafter, all countries, including USA were trying to increase the revenue. During the period, many money laundering schemes/ scandals were exposed, two mostly publicized being UBS (overall) and HSBC (for NRIs). IRS realized that while the FBAR requirement is there, it is not being implemented so they saw the potential.
(v) UBS and HSBC cases: UBS and HSBC both banks accepted that they were involved in practices of money laundering, intentionally circumventing the laws, or not reporting of accounts or financial transactions. Both banks paid huge fines, promised not to solicit US residents’ investments abroad AND declared information about the account holders to the IRS. Can you believe when I tell you that, the UBS banker, who was one of the accused and went to prison after telling IRS, received US$ 104 million reward, HIGHEST in US History, under the whistleblower program? Just imagine how serious USA is.
(vi) Overseas Voluntary Compliance/Disclosure Program/Initiative (OVCI/ OVDP/OVDI/OVDP): Four Offshore Voluntary disclosure/compliance program/initiatives have been issued by the IRS in 2003, 2009, 2011 and 2012. While the 2003, 2009, and 2011 programs had a specified period to join, the 2012 program is, at present, open ended. The reason for the 2003 program was information shared by promoters who used offshore bank card to access hidden offshore income. The main reason for 2009 program was the summons for UBS Bank and 2011 program was the summons for HSBC and other foreign banks. The reason for 2012 Offshore Voluntary Disclosure Program is the FATCA and increased actions against a number of foreign financial institutions. And, it is a great source of revenue for the USA.
As per the program, US person is to disclose all the foreign financial account and related income, revise all previous years’ tax returns, pay tax, interest, penalty as well as pay FBAR penalty based on the highest balance in foreign financial accounts. While there was no offshore penalty in 2003 program, the offshore penalty on the highest balance was 20%, 25%, 27.5% for 2009, 2011 and 2012 programs respectively.
NRIs, who had not filed FBAR or voluntarily disclosed the foreign assets had to face severe consequences in terms of paying back taxes, huge penalties and also went to jail.
(vii) GAO Report: As per the GAO report of March 2013, IRS has collected about $5.7 Billion from 34,000 delinquent US persons as of December 31, 2012. Out of which $4.1 Billion is from OVDI 2009 and $1.4 Billion from OVDI 2011 programs. As all cases not completed as of December 31,2012 the collection, which already is a significant amount, is expected to increase.
As per the January 6, 2014 GAO letter regarding locations of the foreign bank accounts in OVDP 2009, India has the 10th highest accounts as per the FBAR forms with Switzerland in the top spot with 42% of accounts (UBS is a Swiss bank). With HSBC and India being the main factors for OVDI 2011, India could be in top 3 countries with number of offshore accounts and may be top 5 overall in all the programs. This shows India’s prominence in offshore accounts.
2. FATCA:
Foreign Account Tax Compliance Act (FATCA) was enacted by the US in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act to combat tax evasion by US nationals holding investments in foreign accounts. The objective of FATCA is the Reporting of Foreign Financial Assets (FFA) to IRS.
The reporting objective of Foreign Financial Account under FATCA is two-fold. The US tax payers report foreign financial assets and income in Form 8938 to IRS and Foreign Financial Institutions (FFI) to report certain information to IRS in the same manner any US Financial Institution reports to IRS.
Following the enactment of FATCA, Treasury published the Model Inter Governmental Agreement (IGA) for simplified reporting wherein the country would enter into a FATCA agreement with USA either providing combined information of all FFI (e.g. RBI in India) or allowing respective FFI directly report to IRS (e.g. SBI).
Requirement for Form 8938 was introduced from calendar year 2011 tax return and is required if the US person (filing as Single) has Foreign Financial Assets above US $ 50,000 at year end or US $ 75,000 at any time during the year and US $ 200,000 at year end or US $ 300,000 for individuals living in USA or abroad respectively. The limits are doubled for married filing jointly taxpayers.
FFI reporting to IRS was originally effective from January 1, 2014. Look at the planning…3-4 years in advance. While Form 8938 was effective as planned from calendar year 2011, convincing all other countries having different laws and legal system in different geographies and language, having different culture and banking laws is a unimaginably challenging task. So while it was planned to be effective from January 1, 2014 with pre-existing account analysis date of December 31, 2013, it is just been delayed by 6 months to June 30, 2014.
3. FATCA Update:
On November 8, 2012, USA identified 50 countries and jurisdictions with which they want to enter the FATCA agreement for sharing of financial information. As of March 11, 2014, FATCA agreements have been signed with 25 countries.
The countries include major developed countries such as UK, Japan, Germany, France, Italy, Canada, Norway, Denmark, Finland, Netherlands; tax heaven countries such as Switzerland, Isle of Man, Cayman Islands, Guernsey, Jersey, Malta, Bermuda, Mauritius and other countries such as Chile, Hungary, Spain, Costa Rica, Ireland and Mexico. Also, while an Agreement with Australia is not currently available on the FATCA website, news reports already mentioned that Australia signed the FATCA agreement at the time of hosting G20 summit in February 2014.
So there are only 25 countries to go, including India to enter FATCA agreement by June 30, 2014.
4. US – India FATCA Agreement Update:
On November 8, 2012, USA identified India as one of the 50 countries or jurisdictions for FATCA agreement. At that time, USA has been working with India to explore options for intergovernmental engagement. Since then, a lot of progress has been made.
It started in October 2012 with then US Treasury Secretary Tim Geithner and then US Fed Chairman Ben Bernanke meeting with Prime Minister Dr. Manmohan Singh and India’s Finance Minister P. Chidambaram. Since then, there has been lot of dialogue continued between two countries. By November 2013, the Finance Ministry had asked RBI and SEBI’s views and suggestions on the proposed FATCA agreement. SEBI in turn had also met with Mutual Fund Houses, Foreign Institutional Investors (FII) and the brokers regarding FATCA.
Officials from the RBI, SEBI and the Income-Tax department have traveled to the USA and held consultations with their counterparts to finalize the framework. A team of the US Treasury officials also met Indian Income Tax and CBDT officials and are negotiating an Inter-Governmental Agreement (IGA) between two countries.
The Department of Treasury has already added India as one of the jurisdictions that have reached agreements in substance and have consented to being included in the list as Model 1 IGA beginning from April 11, 2014. Please click here for the link to Treasury’s website. I think the USA-India FATCA agreement will soon be a reality.
5. What a typical NRI thinks:
After talking or giving consulting to a lot of NRIs, what I learnt is that 95%+ NRIs are not serious about FATCA. In spite of having lived in the USA, they still think as an Indian that it would not affect them and are still in the denial. I have listed below TOP 10 common defenses (excuses):
- India will never sign. OR India will get additional benefit as Indian population in USA is huge.
- I only have one account, another NRI has 5 accounts. I am a very small and have only $60,000. I know many people who have more than $6 million. They will catch them and not me.
- Indian banking systems are not so advanced that they will find my information. With so many NRIs, it will take years to collect all the data.
- I will say I didn’t know about the rules or requirements.
- I will see when I get there or act only after receipt of notice.
- I am on H1B visa OR I am a US citizen but living in India, and requirements do not apply to me.
- All my investments are as a resident only OR my account is with cooperative bank which does not report any income or information.
- I do not have a PAN and do not file tax return in India so they would not know anything about me.
- I will sell everything and transfer money here.
- I will tell that I received gift/inheritance in the current year and start reporting from now.
The question should not be “What if”; it should be “When”. I expect India to sign Model 1 agreement wherein RBI and not individual bank will report the transactions to IRS.
When India signs the FATCA agreement and RBI reports to IRS,
- whether you have accounts or investments in NRO, NRE, FCNR, or Resident account;
- in foreign, private, nationalized, co.op. bank or Post Office or PPF;
- in single or joint name;
- as NRI or resident;
- have PAN or not have PAN;
- KYC compliant or not;
- with domestic or foreign mutual funds;
- with domestic DP or PIS account;
- with local or international brokerage firms; or
- with private insurance company or LIC……… wound NOT matter.
In Short, IF YOU OWNED ANY FINANCIAL ACCOUNT ON JUNE 30, 2014, EVERYTHING WILL BE REPORTED IF YOU MEET THE CRITERIA.
7. TWO IMPORTANT THOUGHTS TO PONDER:
A. NOTHING will happen NOW as the deadline for identifying and reporting of pre-existing accounts is June 30, 2016, which may be extended. Once USA gets all these data, a special team will analyze it for let’s say 6-12 months or more and then start issuing notices. So, you may not get a notice from IRS until 2017 or 2018. While you are happy giving your examples to your friends that you did not disclose or report or were not proactive and still nothing happened to you in 2014, 2015 or 2016 but it will hit you later.
B. You wouldn’t be a “US person”, if you don’t know how strict and sincere USA is about laws and to what extent they can go for compliance. USA is NO India when it comes to legal system and compliance. In India, the VDIS (Voluntary Disclosure of Income Schemes) have tax of 30% for any versions and no penalty; whereas under OVDI/OVDP, not only you pay tax, interest and penalty, the penalty also increases in later versions (20% à 25% à 27.5%), rewarding anyone who came early. And, even after paying big shot lawyers and paying taxes and huge penalties (in million $s), NRIs have also gone to jail for FBAR violations in the USA.
8. My Advice:
- Don’t take FBAR and FATCA requirements lightly.
- INDIA WILL SIGN THE FATCA AGREEMENT.
- Come out of denial that it will not happen to you.
- ACCEPT the realities and ACT.
- Be proactive. Start planning, SEEK GUIDANCE and COMPLY.
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