The government [of India] has asked the Reserve Bank of India to draft an agreement that Delhi can sign with Washington to shield Indian financial institutions from a controversial US legislation,which seeks to penalise entities that fail to report dealings of American residents to the US revenue authority
Times of India
RBI to Work on Pact to Counter US Law Impact
Central bank to draft agreement that Delhi can sign with Washington
DEEPSHIKHA SIKARWAR NEW DELHI
The government has asked the Reserve Bank of India to draft an agreement that Delhi can sign with Washington to shield Indian financial institutions from a controversial US legislation,which seeks to penalise entities that fail to report dealings of American residents to the US revenue authority.The Foreign Account Tax Compliance Act,due to come into force from January 1,proposes a 30% withholding tax on any payment made to a foreign financial institution by a US firm if it does not comply with the regulation.We are examining as to how we need to deal with it… RBI will prepare a draft of an enabling domestic legislation, a finance ministry official told ET.The FATCA,enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act,aims to combat tax evasion by US nationals holding investments in offshore accounts.It is seen as advancement over the antimoney laundering framework put in place by the Financial Action Task Force,a global body tasked with curbing money laundering.Under the provisions of the new law,US taxpayers holding financial assets outside the country must report those assets to the revenue authorities.The law also requires foreign financial institutions to report directly to the US Internal Revenue Service details of accounts held by US taxpayers or foreign entities in which US taxpayers hold a substantial ownership interest.Any entity failing to register will face a higher witholding tax rate from all US firms that they deal with.The law will pose a similar challenge to Indian financial institutions.Indian entities may need to intensify the know your customer (KYC) requirements and also register with American tax authorities individually if there is no bilateral agreement among the two countries.They will need to undertake prescribed identification exercise for US taxpayers and report annually to the US revenue authorities.Experts say the Indian governments move is in the right direction.Any Indian financial institutions dealing with a US resident directly or indirectly will have to ensure compliance with FATCA … Entering into agreement with US authorities on individual basis may prove cumbersome for institutions, said Anish Thacker,partner (tax and regulatory services) at Ernst & Young.However,experts point out that norms under the Foreign Exchange Management Act also mandate stringent KYC norms.The existing restrictions under FEMA significantly reduce exposure of Indian financial institutions to FATCA, said Shinjini Kumar,director at PwC.She,however,said lack of clarity in the law makes it difficult to ascertain the exact impact on Indian financial institutions.