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TMI BlogGuidance Notes on Implementation of Reporting Requirements under Rules 114F to 114H of the Income -Tax RulesX X X X Extracts X X X X X X X X Extracts X X X X ..... countries, such information 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 114H and Form 61B to provide a legal basis 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 Commenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keep Financial Assets for the account of others, such as custodian banks, brokers and 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 financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porting Financial Institutions while Foreign Financial Institutions, their foreign branches and foreign branches of Indian Financial Institutions are not. 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial Accounts they maintain to identify whether any of them need to be reported. The general rule is that a Financial Account is an account maintained by a Financial 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 mea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Financial Accounts they maintain they are required to review those accounts to identify whether any of them are Reportable Accounts. Where they are found to be Reportable Accounts information in relation 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 presc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation (A) to Rule 114F(6) and includes regularly traded entities etc. 4.3.5 Controlling Person is defined in Explanation (B) to Rule 114F(6) to mean the natural person who exercises control over an entity and includes a beneficial 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d USA., i.e., 31st August, 2015, there is an alternate procedure for due diligence prescribed in Rule 114H(8). As per this alternate procedure, the self-certification required for New Accounts should be obtained within one year 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the electronic search, no further action is required unless there is a change in circumstances which results in one or more indicia being associated with the account, or the account becomes a high value account. 5.3.4 Notwithstanding finding of indicia in the case of low value 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extent that the computerised systems of the RFI links the financial accounts by reference to a data element such as client number or taxpayer identification number, and allows account balances or values to be aggregated. In the case of a high value account the RFIs are also required to aggregate those financial 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting financial institution does not verify the said account holder's Global Intermediary Identification Number issued by the US IRS if the account holder is an FI referred to in sub-clauses (e) to (m) of Clause 5 of Rule 114F. * the account holder is a financial institution from a country/territory which has entered into 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 rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be reviewed to ascertain whether it is a reportable account. 5.5.2 In the case of US reportable accounts, not falling under the exemption as above, and in case of other reportable accounts, on account opening, the reporting financial institution must obtain a self-certification, as part of the account opening documentation, 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 ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion collected and maintained in accordance with the rules made under the Prevention of Money-laundering Act, 2002. (c) for purposes of determining whether a controlling person of a passive non-financial entity is a reportable person, a reporting financial institution may rely on a self-certification from the account holder 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) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. 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. In case of accounts other than depository or cash value accounts, the financial institutions should make reasonable efforts to obtain the self-certification, particularly in those 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract, the cash value or surrender value) at the end of relevant calendar year or, if the account was closed during such year, immediately before closure; (e) in the case of any custodial account,- (i) the total gross amount of interest, the total gross amount of dividends, and the total gross amount of other income generated with respect 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 releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son as agent, custodian, nominee, signatory, investment advisor, or intermediary, such another person will be treated as holding the account. (b) In the case of a cash value insurance contract or an annuity contract, the account holder is any person entitled to receive a payment upon the maturity of the contract or any person entitled to access the cash 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reporting financial institution will then be provided the options to upload the Form 61B. The Form is required to be submitted using a Digital Signature Certificate. (c) In case Nil statement has to be submitted by the RFI, the option to submit Nil statement is required to be selected. The reporting financial institution will then be required to submit a declaration with respect 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds of being a "financial account with a local client base" since they need to report the financial accounts held by a specified U.S. person. 9. Contact details for further clarification For further clarifications and suggestions/feedback for the updated version of the Guidance Note, the following officers may be contacted (a) For General Queries Mr. Akhilesh Ranjan, 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. Cur ..... 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