Foreign Tax Compliance

Reporting For Foreign Tax Compliance:

Data provided by us :

  • Details of all the different types of incomes, date wise, as per respective financial year.
  • Name & Address of the source of income.
  • Conversion of each income in respective foreign currencies as per prescribed reference rates.
  • Tax withheld (TDS) / Advance Tax (Prepaid Taxes).
  • Finally tax liability on that income and tax paid on the income for which credit is to be claimed.
  • Details of assets held at the end of the respective year in respective currencies.
  • Details of investments made during the respective year in respective currencies.
  • Closing balance of Mutual Fund units at the end of the year, for USA, in prescribed format (Form 8621).

Overview Of FATCA & FBAR:

Requirement of US Tax Laws

On ground scenario

FATCA & FBAR – effective tools to check evasion of taxes on income outside of US

FBAR (Report of Foreign Bank and Financial Accounts) :

United States Persons are required to File Form 114 if :

The United States person had a Financial Interest in or signature authority over at least one financial account located outside the United States

and

The aggregate value of all foreign financial accounts exceeded US $ 10000 at any time during the calendar year reported.

FATCA (Foreign Account Tax Compliance Act) :

  • FATCA targets tax non – compliance by US tax payers with Foreign Accounts.
  • FATCA requires US Tax payers to file Form 8938 on Foreign Financial Assets.
  • FATCA requires Foreign Financial Institutions (FFI’s) to report to the I.R.S; information about financial accounts held by US tax payers.

FATCA Compliance by Indian (FFI’s) :

  • Determination date for FATCA : 30th June, 2014.
  • All new accounts opened after the determination date.
  • Pre existing accounts electronic search of information in the system.  
  • High value accounts (US$ 1 mn +) paper record search + inquiry of Relationship Manager, additional requirement.
  • Closed accounts also subject to the above process.

Types of Foreign Assets and Whether They are Reportable

Overview Of CRS:

CRS – Common Reporting System

  • FATCA version of OECD (Organisation for Economic Co-operation & Development) countries.
  • Platform to exchange financial information in respect of residents of 112 countries.
  • Countries include – India, United Kingdom, UAE, Singapore, Hong Kong, China, Australia, Canada, Germany, Switzerland etc.
  • Determination date : 31st December 2015.
  • All Accounts supposed to be reported (without minimum balance exclusion).
  • Income to be reported under CRS over & above the accounts and investments.
  • Transactions with all entities are to be reported.  FI with local client base, retirement funds etc. not exempted in CRS.

Exchange of information

As per the article on ‘Exchange of Information’ in several DTAAs, the tax authorities of both jurisdictions shall exchange information relating to all taxes applicable to residents to avoid evasion of taxes or frauds.

Such exchange can be on a routine basis or on request with reference to particular cases. Either jurisdiction shall provide the other with such information and documents as requested unless it involves certain confidential data.

Streamlined Filing Compliance Procedures (SFCP):

Individuals can take benefit of Streamlined Filing Compliance Procedures (SFCP) in U.S.A. to report and pay taxes on undisclosed foreign financial assets. It has to be done before detection of incompliance.

  • SFCP can be Streamlined Domestic Offshore Procedures (SDOP) for tax residents residing in U.S.A. and Streamlined Foreign Offshore Procedures (SFOP) for tax residents not residing in U.S.A.
  • The eligibility requirements for each of the two procedures, the types of costs to be incurred and the compliance procedures to be followed have been listed in the following slides.
  • Taxpayers who fail to meet the eligibility conditions of both the categories shall not be eligible for SFCP disclosure program.

Streamlined Domestic Offshore Procedures (SDOP)

  • In order to be eligible for SDOP, the Individual U.S. taxpayers, or estates of individual U.S. taxpayers, must:
  • fail to meet the applicable non-residency test for the number of days of stay in previous years (as stated);
  • have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed;
  • have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBARs and/or international information returns; and
  • certify that such failures resulted from non-willful conduct.

The costs to be incurred for SDOP shall be as follows:

  • There is a flat 5% penalty (inclusive of all penalties including FATCA, FBAR, etc.) on unreported foreign financial assets.
  • It is calculated on the highest aggregate value of all unreported foreign financial assets on the year end balance in the past six years.
  • The taxpayer also has to pay appropriate additional taxes in the revised Tax Returns for the past three years and statutory interest as applicable on it.
  • The legal fees of the U.S. tax attorney/CPA assisting in the compliance and advisory functions.

The taxpayer needs to fulfill the following compliances for SDOP:

  • Amended Tax returns for the most recent 3 year period for which the due date (or properly applied for extended due date) has passed.
  • FBARs for the most recent 6 year period for which the FBAR due date has passed.
  • Self Certification, signed under penalties of perjury –
  • that Taxpayer is eligible for the Streamlined Domestic Offshore Procedures;
  • that all required FBARs have now been filed; and
  • that the failure to file tax returns, report all income, pay all tax, and   submit   all required information returns, including FBARs, resulted   from nonwillful conduct.

Streamlined Foreign Offshore Procedures (SFOP)

  • In order to be eligible for SFOP, the Individual U.S. taxpayers, or estates of individual U.S. taxpayers, must:
  • meet the applicable non-residency requirement test;
  • have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account; and
  • certify that such failures resulted from non-willful conduct.

The costs to be incurred for SFOP shall be as follows:

  • There is a flat NO penalty on disclosing the unreported foreign financial assets.
  • The taxpayer also has to pay appropriate additional taxes in the amended Tax Returns or delinquent/new tax returns (if not filed earlier) for the past three years and statutory interest as applicable on it.
  • The legal fees of the U.S. tax attorney/CPA assisting in the compliance and advisory functions.

The taxpayer needs to fulfill the following compliances for SFOP:

  • Delinquent (If not filed earlier) or Amended Tax returns for the most recent 3 year period for which the due date (or properly applied for extended due date) has passed.
  • FBARs for the most recent 6 year period for which the FBAR due date has passed.
  • Certification, signed under penalties of perjury –
  • that Taxpayer is eligible for the Streamlined Foreign Offshore   Procedures;
  • that all required FBARs have now been filed; and

that the failure to file tax returns, report all income, pay all tax, and   submit   all required information returns, including FBARs, resulted   from nonwillful conduct.