Mumbai: With barely a day left to comply with the US Federal tax law, Foreign Account Tax Compliance Act (FATCA), various financial institutions including banks, mutual funds and insurance companies have met with finance ministry officials, expressing concerns over non-compliance besides seeking an extension to the 31 August-deadline, said two people familiar with the development.
The extension sought is backed by the rationale that massive investments face the risk of being temporarily locked-out until account-holders adhere with the rules.
In addition, the mutual fund industry will lose out of fresh subscriptions (lump sum inflows) by such account-holders in the event of non-compliance, they said requesting anonymity as discussions are still underway.
An estimated ₹ 70,000 crore worth of mutual fund assets face the risk of temporary lockout until such rules are complied with, said one of the persons cited above, adding that this value continues to drop as a number of investors have achieved compliance.
“The value has drastically reduced. There is some time available before the number can be further brought down. Lot more accounts and investors are getting complied with Fatca. Mutual funds may not have issues, it is the banks that are facing concerns and have asked for a possible extension," said the first person.
The Economic Times reported on 19 July that fund houses stared at a possibility of ₹ 1.08 trillion redemption in a event of failure in complying with FATCA guideline.
Due to the new Act called the FATCA, which was passed in the US in 2010, financial institutions in many countries are required to disclose details of their clients’ income, and if they are either residents of the US or financially connected to the US or have any tax residency in US.
US residents could either be citizens or green card holders. The rule was enacted to prevent tax evasion through offshore investments that some residents may have.
“No transaction can be done, whether subscription or withdrawal, until FATCA application is completed and compliance is achieved. That said, we are working and trying our best for maximum compliance," said Sundeep Sikka, executive director & chief executive, Reliance Nippon Life Asset Management Ltd.
C.V.R. Rajendran, who is at the helm of affairs at Association of Mutual Funds of India (AMFI), said the mutual fund industry body is waiting for further directions from the finance ministry regarding the 31 August deadline.
“There have been various discussions by various bodies. AMFI is prepared and has been trying to achieve full compliance, even by conducting ground-level work in cases where investors are not reachable through phones. However, people are not traceable or contactable and whether the 31 August stays or gets extended, you cannot achieve 100% compliance immediately. We are prepared and will see once the deadline lapses. As and when, people realize the need for funds (withdrawals or lump sum payments) will they go and get themselves complied with the authorities. Also to clarify that accounts or assets will be frozen so investors will continue to reap benefits related to market movements," said Rajendran.
The US has for long required its residents to disclose all their international income as well. But since such voluntary disclosures did not take place at the pace that was needed, the US then enacted the FATCA law, whereby the US government decided to put the onus on companies and firms around the world to get this information.
To that effect, it has so far signed Inter Government Agreements (IGA) with more than 50 countries, including India, making it mandatory for these countries’ financial institutions, such as banks, insurance companies and mutual funds, to furnish details of clients or investors who are based in the US. If the firms refuse to cooperate, the Act allows the US government to deduct 30% tax from these companies if they are already registered or doing business in the US.
“Existing investors will not be able to move out or withdraw investments until complied with FATCA. This will push fence sitters or people complacent in this regard to comply with the rules," said Dinesh Kumar Khara, managing director, State Bank of India (SBI) Ltd who served as chief executive at SBI Funds Management Pvt. Ltd before being promoted earlier this month.
According to the FATCA guidelines, this information needs to be collected only from those investors who have opened “accounts" on or after 1 July 2014 or if they have an account as on 30 June 2014 wherein the value of investments is above $50,000. “Accounts" here mean folios in MF parlance. The details asked are very basic. All your fund house needs to know is your country of birth, the country in which you live (yes, most of you will say India), and whether you pay taxes in any other country apart from India.
For instance, an individual could have stayed in the US for some years or might be a US citizen living in India for some years now, but paying taxes in both countries. If the individual has been paying taxes in any country apart from India, you need to provide the tax identification number or any such number equivalent to the Permanent Account Number (PAN) here.
“FATCA deadline is a non-issue because the moment of truth will eventually come out once the deadline has lapsed. We have tried our utmost best to contact clients and investors in achieving 100% compliance. However, there may be some individuals who are not reachable or who may be complacent about it. I think some large aggregators having a large retail base may face certain difficulties as and when clients realise the repercussions. SIP inflows may not get hampered but non-compliance will result in closure in fresh lump sum inflows, switches and withdrawals, until account holders comply with the rules," said Kartik Jhaveri, director, Transcend Consulting (India) Pvt. Ltd, a wealth manager.