US-Cayman FATCA Deal: India Impact?

Published on Mon, Dec 23,2013 | 23:52, Updated at Mon, Dec 23 at 23:52Source : Moneycontrol.com | Watch Video :

Estate tax, Exit tax and now FATCA with Cayman – US disclosure rules are impacting Indian Americans in more ways than one. Brian Rowbotham, Managing Partner, Rowbotham & Co. spoke to CNBC-TV18's Payaswini Upadhyay about the tax conundrums facing Indian Americans.

Upadhyay: You have been meeting a lot of families and individuals here in India. As you put it, a lot of them are trapped in the US tax system. Help me understand what are their concerns?

Rowbotham: The big concerns that are occurring are with families that are in India that have US family members who have a green card status or US citizenship status. A lot of families have expanded there – they have gone to universities in the US and started companies. In 2008, the US changed its tax laws and ultimately imposed a 24 percent on an individual that wishes to return to India and no longer be subject to US tax. It is called the expatriation tax. Secondly with US citizenship or with green card status, these individuals can be subject to a 40 percent Estate Tax. So, companies that are in India where they have been passed down for generations with a family member that now has US status, they can lose 40 percent to the US government with the US Estate tax that has been around for many years. That along with the 2008 changes is the concern.

Upadhyay: You mentioned the change happen in 2008. It has been around for a while. Why is it pinching now? These rules of tax have been around for a while for these families or individuals to see it coming?

Rowbotham: The basic reason in my view is people that have returned to India are getting advice from Indian advisors and they are not always in touch with the details and the ramifications of tax law changes or of the changes that are going on with disclosure about foreign banking and foreign investing. That is the cause of why they haven't really kept up. The local advisors are doing the best they can but they are not in the US; so they struggle to keep up.

Upadhyay: This 24 percent exit tax as you call it - has it seen some sort of litigation in the US or it is yet to come into play?

Rowbotham: It is yet to come into play. What happens with the so called exit tax is one gives up their citizenship and they are deemed to have sold their worldwide assets and they have to report that and pay tax on all the gains worldwide. So, it is a valuation issue. When an individual leaves the US and gives up their passport or green card status they have to step back and assess what is the value and the gain and so this is not yet been challenged but it will be because the dollar is involved in it vey substantially.

Upadhyay: There is a recent development which is that US has signed a FATCA agreement with Cayman Islands which means that a lot of Indians or companies or families who have been investing globally via Cayman- there information can now be easily handed over by financial institutions based out of Cayman to the IRS. What sort of an impact do you see it will have on Indian investors?

Rowbotham: FATCA is Foreign Account Tax Compliance Act. What is happening globally is that governments are agreeing to comply with FATCA. So, if we had a FATCA agreement with India the Indian institutions would have to provide the names and account information of any US person. Cayman has just adopted the rules and in terms of why people go to the Cayman? Global funds are often held through Cayman structures – entirely legal but now these structures are going to be reported if they have any US residents or green card residents that are in these funds and have substantial holdings. Many people in India are investors through these funds; totally legal but may not be in complete compliance with US disclosure rules that attracts substantial penalties. So, this is a major issue in the investment arena.

Upadhyay: So, disclosures relating to the amount that they have invested in the US?

Rowbotham: It is really globally. Let's say you are a general partner or a fund manager and you are living in India but you are putting together a Cayman partnership and you have control or signature authority over financial accounts or bank accounts - in the US you have got to deal with disclosures about these foreign accounts and until Cayman has agreed to pass this information, it wasn't a big concern.

The compliance rules are really complicated and advisors outside the US have a tough time dealing with them. So, this is a new development.

Upadhyay: Let me come to the solutions now. What is it that you are advising these families and individuals that are dealing with this complex US tax system? What can they do to ensure that their global income is not taxed at these high rates and to people who have made investments via Cayman Islands – now that their information is going to be handed over to the IRS because of this FATCA deal? How should they deal this?

Rowbotham: The first question regarding how do people deal with inheriting large amounts from family members- families in India with substantial wealth that have US children, grandchildren are going to have to rethink their strategy. Instead of just willing it over or gifting it to their US relatives, children or grandchildren they may wish to setup an Indian trust and so the assets will not ultimately pass in full to their US family members.

Upadhyay: Has that not been happening?

Rowbotham: It is happening right now as we talk. Indian institutions are exploring this because of this issue. The other question you raised about reporting- to the extent the individuals have paid their taxes, but they just have not complied, they have to make a simple decision for sure- going forward they should disclose and in terms of prior years it depends on the circumstances whether they go back and disclose past years or not. There are different rules involved, so they basically need to seek some advice.

Upadhyay: What kind of penalties are we looking at if the reporting has not been done?

Rowbotham: What the IRS can do is impose a penalty - this is on a foreign bank account that hasn't been disclosed – 50 percent of the highest balance per year for the past 6 years. So, that is 300 percent. If someone had USD 100,000 account sitting in a US bank accounts and did not report it, if they don't basically comply and they get picked up in an audit, the IRS can impose 50 percent per year on that balance. So, financially it is catastrophic. You not only lose your whole account but you have additional penalties to deal with and pay beyond what your full account has got offshore.

Upadhyay: Post this signing of FATCA deal with Cayman, is it something that my financial institution or a hedge fund that is based out of Cayman will call upon me now here in India in terms of any information etc. What is it that I should be ready for after this deal has been signed?

Rowbotham: It doesn't yet involve India. This is a Cayman-US agreement. So, to the extent individuals with US status in India have account balances through investments or their fund managers in Cayman, they need to deal with the disclosure rules in the US or face potential penalties. For individuals that are not investing through Cayman, it is not going to have an effect at the present time.

Upadhyay: This penalty would be what you mentioned earlier, 50 percent of the highest balance

Rowbotham: Right. That is on the foreign bank accounts. It started back in 2009 with the Swiss issue. This whole FATCA issue is developed because of the problem of non-compliance and foreign governments are looking at FATCA as the way to make things transparent and collect a lot of revenue that up till now has just escaped through offshore structures.

Upadhyay: I know you would not want to specifically mention your client names but give me an anecdotal evidence of somebody- a family or an individual- stuck in this US tax system of how to either exit it or give your global assets up for Estate Tax. What is the highest quantum that you have seen thus far?

Rowbotham: In terms of inheritance by US individuals where only assets are actually located in India, it is in the billions of dollars. These are families that - ultimately their children or they themselves have gone to the best universities in US and stayed and become US citizens and then returned to India and they have inherited a vast amount of wealth. So it is at the highest level with some of the largest families in India.