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            Fatca registration, which is mandatory, could reveal technical violations of three other American laws, with penal consequences

            The Foreign Account Tax Compliance Act (Fatca) might be a bigger headache for the Rs 11 lakh-crore-mutual fund (MF) sector than earlier believed. Fatca is an American legislation, under which financial institutions (FI) everywhere in the world are required to register with US tax authorities.

            The FIs are required to provide details of clients who might be subject to American tax laws. These institutions would be subject to taxes on payments originating out of the US if they don’t comply.

            The registration and subsequent declaration of client details is likely to reveal technical violations of a number of other regulations for MFs. This includes the more recent Dodd-Frank Act, the US Securities Exchange Act (1934) and US Investment Company Act (1940), according to experts Business Standard spoke to. They said asset managers would face problems on account of now having to reveal their client base under Fatca.

            “Local funds/asset managers registered under Fatca, would have to report their list of US residents’ unit holders. This could trigger possible compliance under the Dodd-Frank Act which requires those managing/ advising investments for US residents to register with American authorities,” said Bahroze Kamdin, partner, Deloitte Haskins & Sells. Dodd-Frank requires those having more than a certain number of investors to register with authorities in the US.

            “Indian MFs with a sizable number of US investors might inadvertently end up on the wrong side of certain technical US legal-regulatory requirements,” said Tejesh Chitlangi, partner at IC Legal.

            He said this included the US Investment Company Act, which may require an Indian MF to register as an investment company (in the absence of any exemptions), if more than 100 US residents invest in such a fund’s scheme. And, the Securities Exchange Act requires those reaching more than 2,000 US investors to register their securities and file periodic disclosures on operational and financial matters.

            “The recent requirements under Dodd-Frank further adds to the above list of technical requirements. The said technical issues might get escalated and come into the limelight due to Fatca registration, since the US authorities will get to know the exact details of the US investor base of Indian institutions seeking such registration,” added Chitlangi.

            A large number of investments are likely to come in from non-resident Indians (NRIs). A number of MFs are said to have stopped accepting NRI money, following announcements of Fatca being made applicable. But existing investments are said to have continued.

            “The trigger under Fatca is to report details and transactions of US persons in India by financial institutions in India. If it is not reported, violations can trigger a 30 per cent withholding tax/penalty for the institution,” said Vidya Rajarao, partner, Grant Thornton India.

            Those affected under Dodd-Frank would ‘primarily be financial institutions of any kind – banks, MFs, insurance companies, investment advisers,” said Rajarao.

            The chief executive officer of one of the largest MFs said, on condition of anonymity, that such regulations were vast and compliance and disclosures were difficult when the flows from the US are small. MFs have mostly stopped accepting NRI money but already invested capital has not been returned. He expressed the hope that since they are appropriately regulated in the home jurisdiction (India), a lenient view would be taken.

            WARY EYE ON UNCLE SAM
            • American tax regulation Fatca requires MFs to sign up with US authorities
            • They also have to provide details of their clients, including NRI investors
            • This might result in revealing technical violations of three other US laws, say experts
            • Dodd-Frank Act requires registration of those managing investments for US residents; US Investment Company Act requires MFs to sign up if they have more than 100 US residents; Securities Exchange Act requires them to file periodic disclosures on operational and financial matters
            • Violations can invite penal action

            The article appeared in the Business Standard. The article can be found here.

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