Self-certification of Accounts to Avoid Blocking: Explained

Introduction

The Income Tax Department directed financial institutions to block accounts opened by US taxpayers in India between July 2014 and August 2015 unless they are self-certified by April 30. The Central Board of Direct Taxes said this was to ensure compliance with the United States Foreign Account Tax Compliance Act (FATCA) which makes certain that investors from the US pay tax on their income from assets abroad. 

FATCA

  • India had entered an agreement with the United States for implementation of the Foreign Accounts Tax Compliance Act (FATCA) with effect from August 31, 2015. FATCA allows automatic exchange of financial information between India and the US. 
  • FATCA was first introduced in October 2009 by the US Government and became law on March 18, 2010. The objective behind FATCA is to restrict US persons from using any financial institutions like banks, mutual fund houses, etc. outside the USA to park their wealth for avoiding US taxation on the income generated from such wealth. FATCA compel such financial institutions to reveal information of US persons having accounts with them. 

FATCA on Foreign Financial Institution

FATCA has the potential to affect any financial institution across the globe provided that the foreign financial institution (FFI) has a US account. To avoid the risk of suffering the FATCA withholding tax, an FFI will have to do the following:
  • It has to become a participating FFI by entering into a disclosure compliance agreement with the IRS. 
  • It has to meet certain requirements set out in proposed US Treasury Regulations to qualify as a so-called ‘Deemed compliant FFI’ whether as a registered deemed-compliant FFI or certified deemed-compliant FFI. 

FATCA on Non-Financial Entities

FATCA also imposes certain obligations on non-financial foreign entities any foreign entities other than FFIs. NFFEs must provide withholding agents with the name, address, and taxpayer identification number of any substantial US owner. Failure to comply with its obligations then US withholding agent required to withhold tax at a rate of 30% on any payment that it makes.

Foreign entities with NFFE will include:

Foreign partnership or corporation with the US owner who owns more than 10% interest.
Foreign grantor trusts with owners that are US persons.
IRS guidance, other trusts where a US person holds directly or indirectly more than 10% of the beneficial interests of such trust.

FATCA Eligibility

In general FATCA rules do not apply to non-US persons. But it is applicable in case any of the below-mentioned indicators are found.
  • US citizenship/ residence 
  • US place of birth 
  • US address with US PO boxes 
  • US contact number 
  • Recurring payment instructions for payments to a US address or an account maintained in United States 
  • Power of Attorney or Signatory authority granted to a person with a US address. 

FATCA Self-certification

Due to requirements under the Intergovernmental Agreement (IGA) are either met through the ongoing US tax certification renewal process or by provision of a self-certification. Self-certification is required for account holders that are either:
  • Financial institutions that are not required to provide US certification for US tax purposes to operate in a country that has not signed an Intergovernmental Agreement. 
  • Non-financial institutions that are not required to provide US certification for US tax purposes. 
  • Entities operating in the United States that have not provided U.S. tax certification. 
Customers subject to FATCA self-certification will be contacted by their Relationship Officer and are requested to only use the attached FATCA self-certification form in order to provide their FATCA status. Self-certification includes providing details such as country of tax residence, tax identification number from the country, country of birth, country of citizenship, etc.

Conclusion

The account will be blocked for not submitting self-certification then the transactions by the account holder in such blocked accounts will be permitted when the self-certification is obtained and due diligence is completed. In India some of the top mutual fund houses like HDFC, ICICI, Reliance, Birla, etc. have stopped accepting fresh investments from US based NRIs and US Residents to lower the burden of reporting. When an existing mutual investor is acquiring the NRI status or becoming the US or Canada citizen, facilities like switching of schemes, systematic investment plans, dividend reinvestments, systematic transfers, etc. are being stopped by such AMCs and the investors will be asked to sell out. Not all mutual fund houses have stopped accepting investments from the US-based NRIs and some of them are ready to comply with FATCA. These are the important facts about self-certification that must be provided before April 30 to avoid the blocking of accounts.
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