FATCA
1. Starting Common for Both FATCA & Additional KYC requirement .
Starting January 1, 2016, existing mutual fund customers will not be able to purchase, sell or switch transactions if the investor hasn't complied with the additional KYC and Foreign Account Tax Compliance Act (FATCA) requirements. These details have to be furnished by individuals, joint holders, guardian of a minor and power of attorney holders, irrespective of whether they are Indians or non-resident Indian investors.
As per the recently issued SEBI guidelines detailing the disclosures required when investing in mutual funds, apart from the already existing paperwork, an investor has to provide declaration relating to US Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standard (CRS), additional KYC information and Ultimate Beneficiary Ownership declaration from non-individual investors.
2. What is FATCA?
FATCA is an acronym for the Foreign Account Tax Compliance Act, a new set of US Tax Regulations brought in by the US govt. and enacted through the Internal Revenue Service (IRS), which is similar to Income Tax Department in India. This is a piece of U.S. tax regulation that requires all financial Institutes (including Indian Mutual Funds) to report financial transactions of US persons including entities in which U.S. persons hold a substantial ownership, etc. to the relevant tax authorities.
It is introduced by the United States Department of Treasury and the US Internal Revenue Service (IRS), the purpose of FATCA is to encourage better tax compliance by preventing US persons from using financial institutions outside US to avoid US taxation on their income and assets.
3. Why is FATCA declaration required?
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. FATCA became effective July 1, 2014. 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. On 9 July 2015, India signed Model 1 Inter-Governmental Agreement (IGA) with the US IRS for implementation of FATCA. . It enhances due diligence and information reporting requirements for both individual and entity accounts.
4. What is the Purpose of FATCA?
The primary goal of FATCA is to gain information (reporting) about U.S. persons .FATCA aims to detect and discourage offshore tax evasion by U.S. citizens or U.S. residents by requiring financial institutions to identify and report accounts held by U.S. persons. The purpose of FATCA is to prevent US persons from using banks and other financial institutions outside the USA to park their wealth outside US to avoid US taxation on income generated from such wealth. Where account holders refuse to be identified, financial institutions are required to report them based on information available.
5. What is the requirement of FATCA declaration by Indian Mutual Funds?
Indian Mutual Funds are required to share financial account / asset information of accountholders who are tax residents of US. All investors (including new as well as existing investors) has to provide information for FATCA. New Investors including Individual, Non Individual are required to provide this information at the time of initial purchase. FATCA legislation will affect both individual and entities customers who are treated as a ‘US person’ for US tax purposes. The FATCA legislation will also affect certain types of entities with beneficial owners/ controlling persons from US.
An account having U.S. indicia like U.S place of birth, U.S. address etc. does not necessarily mean that the account would be reported. However such accounts would be subjected to closer scrutiny.
Additional KYC
1. What is KYC?
KYC stands for "Know Your client". It is a client identification process. It is a must for all investors who want to invest in mutual fund schemes.
2. Why Additional KYC?
Effective November 1, 2015, all new investors who wish to purchase units of mutual funds have to provide additional KYC related information required for Foreign Account Tax Compliance Act (FATCA)/CRS compliance. The mutual fund body advised fund houses to make the additional KYC information mandatory for investors from January 1, 2016. From January 1, 2016 even existing investors who wish to make fresh purchases, need to complete the additional KYC requirements. . Only after providing this information, will investors be able to make further investments or switches in mutual funds. Fund houses have been asked to reject the new applications if the investor fails to submit these details.
3. What is meant by Additional KYC?
As per the latest requirements, mutual fund investors will have to provide additional know your customer (KYC) details relating to their gross annual income, net worth and beneficial ownership occupation, source of wealth and country of birth. If the investor is tax resident in any country other than India, the additional information required will include tax identification number and country of tax residency.