Indian companies to get relief from US reporting law; to provide details of dealings with American citizens only to local tax authorities

NEW DELHI: India and the US seem to have put behind recent bitterness in bilateral relations to finalise a agreement that will help shield Indian financial entities such as banks, insurance companies, custodians and broking houses from facing penal taxes in the US for failing to disclose the dealings of American citizens.

The US government will, from July this year, implement the Foreign Account Tax Compliance Act, or FATCA, which makes it mandatory for foreign financial institutions to report accounts of US citizens held with them and also accounts of certain foreign entities with substantial US owners. Institutions that do not register and agree to report could be levied a 30 per cent withholding tax on certain US-source payments made to them.

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 offshore accounts. “The broad contours of the framework have been finalized… The draft of the agreement would be fine tuned and then sent to the Cabinet for final nod,” a finance ministry official told ET.


Under the agreement, the Employee Provident Fund Organisation (EPFO), private gratuity and retirement funds besides pension funds will also not face onerous reporting requirements as US has agreed to provide an explicit exemption to these entities under the agreement.

Officials from the Reserve Bank of India, the Securities and Exchange Board of India and the income-tax department had travelled to the US to hold consultations with their counterparts there to finalise the framework.

The US has also assured New Delhi of reciprocity in exchange of information under the agreement though full reciprocity may take some time as the former would require to put in place certain processes and also makes changes in the existing legal framework.

This agreement is crucial as all financial entities doing any business with US citizens have to register by April 25 under FATCA.

With this agreement in place, they will have to provide details of their dealings with US citizens only to Indian tax authorities at home.

New Delhi is expected to ink the agreement soon to allow enough time for these entities to prepare as the regime that will kick in from July. The law mandates that US taxpayers holding financial assets outside the country must report those assets to the revenue authorities. Experts said the exemptions will be welcomed in India. “Providing a specific exemption for retirement/ pension funds like the EPFO will enable them to save significant time, effort and cost in doing the due diligence and reporting required for FATCA compliance.

This will in fact be of help to non-US participants who would otherwise indirectly have to bear these costs,” said Anish Thakkar, partner, tax and regulatory services, EY.