In your interest.
Online Personal Finance Magazine
No beating about the bush.
To avoid costs of compliance, financial institutions in India may decide to filter the US client that they want to be on board. However, the actual impact be realised once RBI, SEBI and other regulators come out with guidelines to ensure compliance with FATCA in their respective domains
The Foreign Account Tax Compliance Act (FATCA), a US legislation meant to target tax non-compliance by US citizens with offshore accounts, has reached the Indian boundary. Regarded as one of the most controversial extra-territorial tax legislations, the Act is likely to impact various types of financial institutions in India such as deposit taking institutions, mutual funds, insurance companies and brokering firms. Regulators in India are bracing up to ensure that financial institutions in India adhere to the FATCA guidelines once it comes into force with effect from 1 July 2014.
Why it is that FATCA has suddenly become so important for India? The reason for growing significance of FATCA comes from the fact that India has entered into in-substance agreement with the US to implement FATCA guidelines. Under FATCA guidelines, there are two types of inter-governmental agreements (IGA), which countries are expected to enter into with the US to avoid non-compliance of FATCA. These are called as Model-1 and Model-2 of the inter-governmental agreements. India has consented to MODEL-1 of IGA.
So what does Model-1 agreement mean? Under Model-1, foreign financial institutions (FFIs) for the US perspective, say an insurance company or bank operating in case of India, would be required to report all FATCA-related information to Indian governmental agencies, which would then report these information to Internal Revenue Service (IRS). Some Model-1 IGAs have also provision for reciprocity, requiring the US to provide certain information about residents of the Model-1 country to the Model-1 country in exchange for the information that country provides to the US. Since India has entered into an agreement under Model-1, Indian financial institutions need not sign an FFI agreement, but they will need to register on the IRS’s FATCA Registration Portal or file form 8957.
So how does FATCA impact financial institutions in India, particularly mutual funds? While the details of the impact are yet to be known, it is very obvious that this act is going to throw various challenges with respect to compliance for mutual funds. Here, are a series of steps that mutual funds will require to take to ensure so that they are FATCA complied and avoid any withholding tax as per the act.
Step-1: Identify US persons who have invested in mutual funds in India: The first step would be to identify persons from the US, who have invested in mutual funds in India. US person for tax purposes are generally considered as:
• A citizen of the US (including an individual born in the US but resident in another country, who has not renounced US citizenship);
• A lawful resident of the US (including a US green card holder);
• A person residing in the US.
• Somebody who has spent considerable period of time in US on a yearly basis.
• American corporations, estates and trusts may also be considered US persons
The need for identifying US person arises from the fact that money invested by these entities in India, need to be reported to IRS in the US.
Step-2: Identify what needs to be reported: Foreign financial institutions or FFIs need to report to the IRS under FATCA. While the threshold limit for reporting will be specified by the regulators in India based on FATCA regulation, mutual funds will need to understand the reporting requirements under FATCA, in terms of threshold limits. As per FATCA, US persons need to report to IRS in the following scenarios:
• If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year.
• The threshold is higher for individuals who live outside the United States.
• Thresholds are different for married and single taxpayers.
The threshold of $50,000 may become applicable in case of mutual funds in India as well. This would require tracing all accounts, which have investments beyond this limit. There is a provision for third party reporting under FATCA for FFIs which says, “Foreign financial institutions may provide to the IRS, third-party information reporting about financial accounts, including the identity and certain financial information associated with the account, which they maintain offshore on behalf of US individual account holders”.
Step-3: Understand registration process, responsibilities and penalties: Since India has signed Model-1 agreement, mutual funds in India will have to register with IRS and obtain Global Intermediary Identification Number (GIIN). The basic requirement under FATCA for mutual funds is to identify reportable accounts and provide details of these accounts to IRS.
FATCA imposes certain obligations on foreign financial institutions, which will become applicable for mutual funds in India as well. Under FATCA, FFIs that enter into an agreement with the IRS to report on their account holders may be required to withhold 30% on certain payments to foreign payees if such payees do not comply with FATCA.
Unless otherwise exempt, FFIs that do not both register and agree to report face a 30% withholding tax on certain US-source payments made to them. Since mutual funds do not fall under exempt category, these funds will to face issue of withholding tax and hence it becomes important to ensure compliance.
Basically, FATCA will result into higher compliance cost for mutual funds in India. There is a possibility of penalty as well if the compliance requirements are not met. Many mutual funds may weigh cost-benefit options arising from this new legislation as well. In order to avoid costs of compliance, financial institutions in India may decide to filter the client that they want to be on board. However, the actual impact be realized once Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) and other regulators come out with guidelines to ensure compliance with FATCA in their respective domains.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
When will a regulator like SEBI be made accountable?
After 25 years of existence, does the Securities & Exchange Board of India (SEBI) need to pause and re-examine its attitude to regulation and market development? Not a day passes without SEBI issuing a press release on how it is tightening this rule, reworking those guidelines or tinkering with some other provision. Yet, for all that hard work, its record on some key parameters is pathetic. India’s investor population has halved (even by SEBI’s own latest survey); the mutual fund industry is in the doldrums; some of the best companies no longer want to be listed; price manipulation is as rampant as ever (see the Unquoted section in any issue of Moneylife); and, as far as investors getting their money back is concerned, SEBI’s record is zero—barring one solitary and dodgy case of contrived disgorgement of unlawful gains.
When SEBI came up with its new corporate governance rules (the third major revision in 15 years), a senior market professional sent us this interesting note. He says, “Under the new rules, there is a provision that certain disclosures by listed companies have to be made within one working day. I have no quarrel with that. But how about a similar rule that prescribes a minimum period within which a regulator will respond to letters from companies or persons under investigation?” (Clause 35A of the listing agreement makes it mandatory for companies to submit results of the voting to the stock exchange within 48 hours of the conclusion of its general meeting).
While SEBI is busy tightening the screws on listed entities, investors and market intermediaries, it does not even have a norm for passing final orders, once the hearings are completed. The latest example is an order passed on 24 December 2012 for a hearing (in the Dilip Pendse vs SEBI case) that was concluded in July 2011—one and half years later. The matter went before the Securities Appellate Tribunal (SAT) which accepted the contention of inordinate delay and asked SEBI to pass a fresh order after a new hearing. What is even stranger in this particular case is that the whole-time member (WTM) who passed the order, apparently, was not with the regulator for a while and was re-appointed.
It is also important to remember that SEBI started out having norms for passing orders.
However, in a well-known case, all charges against a stockbroker had to be dropped without going into the merits of the charges, because SEBI failed to pass the orders in time. It is unclear whether SEBI deliberately dragged its feet, since the broker was powerful but the rule has changed.
Clearly, fixing a strict timeframe for completing hearings, investigations or passing orders may be grossly misused, unless there are stringent penalties for non-compliance, with the SEBI chairman (or other independent regulators) being made directly accountable. Here, too, accountability would be meaningless, unless there is a stiff monetary penalty or loss of job with no room to exonerate failure with silly excuses. This lack of accountability comes at a price—the high cost of regulation and continued investor disenchantment.
IRDA should act a little more in consumer interest
ARight to Information (RTI) application to the Insurance Regulatory Development Authority of India (IRDA), followed by an appeal, is what it took to ferret out the information that, until August 2013, Reliance Life Insurance, through its corporate agent, had defrauded 2,141 persons into buying insurance with the false assurance that they would get an interest-free loan equal to 10 times the premium. The agent was AB Capital which ran a call centre that expertly duped people by claiming that the loan would be processed once the policy was bought. Immediately after the policy purchase, they would stop taking the calls.
Until the RTI, Moneylife Foundation (MF), our not-for-profit entity, and Raj Pradhan our insurance expert, had been plodding, case after case, to help the 30-odd victims of this fraud to get back nearly Rs22 lakh from Reliance Life. We repeatedly wrote that the geographical spread of the victims made it clear that the complaints reaching us were a fraction of those duped. It is not that Reliance Life has not initiated action. It has terminated the agency contract AB Capital and filed a criminal complaint, leading to the arrest of five officials. But, contrary to what it claimed to the regulator, the fraud has not ended with 2,141 cases. Our insurance helpline continues to receive complaints even today. In fact, Reliance Life has now adopted stricter standards for making payments. Why would IRDA not follow a clear and simple process to find out how many people have been cheated? The process would be to ask Reliance Life to provide a list of all policies sold by AB Capital, eliminate those who have got their money back and publish a list of all others on IRDA’s website, or in a national daily, asking people to write to a central helpline if they have also been cheated. The job of the regulator is not merely to act as a post-office while harried persons run from pillar to post seeking redress.
We do admit that IRDA has levied stiff penalties against several insurers, including Reliance Life, for mis-selling and other violations after due process and investigation. That surely has its place, but a financial regulator needs to have a parallel process of forcing those guilty of mis-selling to collate, compile and redress grievances through refunds. The regulator must recognise that Indian regulatory and legal systems rarely compensate victims by way of costs, interest or for the mental agony and hardship suffered in fighting their battles; so, the least they can ensure is that the money is refunded quickly.