Foreign Portfolio Investments and International Tax Compliance for AIFs (Section D - Part 3)
This third part of the short notes for Chapter 17.D examines the regulatory interfaces between Alternative Investment Funds (AIFs) and foreign investment frameworks, as well as the rigorous international tax reporting standards required under FATCA and CRS.
17.27 SEBI (Foreign Portfolio Investors) Regulations, 2019
The SEBI (Foreign Portfolio Investors) Regulations, 2019, alongside Reserve Bank of India (RBI) circulars, govern how foreign capital enters the Indian market. A critical development in this space relates to AIFs established in the International Financial Services Centre (IFSC).
Sponsor Contributions in IFSC
In May 2021, the RBI permitted "Indian Parties" to make sponsor contributions to AIFs set up in an IFSC under the automatic route, provided they meet specific regulatory conditions.
Definition of "Indian Party"
For the purposes of these regulations, an Indian Party is defined as:
- A company incorporated in India.
- A body created under an Act of Parliament.
This provision facilitates the growth of India-centric funds within the IFSC by allowing domestic sponsors to commit capital more easily to these offshore-onshore vehicles.
17.28 Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS)
To combat global tax evasion and ensure transparency, AIFs in India must comply with international reporting standards. These frameworks are designed to ensure that taxpayers do not hide assets in offshore accounts.
1. Origin and Purpose
- FATCA: Introduced by the United States Internal Revenue Service (IRS) to address revenue loss from offshore tax abuse by U.S. citizens who failed to declare income from non-U.S. accounts.
- CRS: A similar global standard developed by the OECD for the automatic exchange of financial account information between participating countries.
2. Implementation in India
To operationalise FATCA and CRS, the Indian Government amended the Income Tax Act, 1961, notifying Rules 114F to 114H of the Income Tax Rules, 1962. The Central Board of Direct Taxes (CBDT) has also issued guidance notes to assist funds in implementation.
3. Entity Classification
Under these rules, every AIF must ascertain its legal status as either:
- Financial Institution (FI): Most AIFs fall into this category.
- Non-Financial Entity (NFE): Entities that do not meet the FI criteria.
If an AIF is a Financial Institution, it must further determine if it is a Reporting Financial Institution (RFI). An RFI is required to register with the US IRS to obtain a Global Intermediary Identification Number (GIIN) and register with Indian Income Tax authorities for reporting purposes.
Due Diligence and Investor Obligations
AIF Managers are legally obligated to perform rigorous due diligence on their investors. This is a continuous process that begins at on-boarding and continues throughout the investment life cycle.
Required Information from Investors
AIFs must collect self-declarations and documentation from all investors, including:
- Identification: Name, Address, Nationality.
- Birth Details: Place (city/state) and Country of birth.
- Financial Profile: Gross Annual Income and Occupation.
- Tax Identifiers: Permanent Account Number (PAN) and Tax Identification Number (TIN) for the country of residence.
- U.S. Identifiers: Social Security Number (SSN), if applicable.
Ongoing Compliance
- Mandatory Filing: Since January 2016, it has been mandatory for all Indian and NRI investors in an AIF to file a FATCA self-declaration.
- Reporting U.S. Persons: If an investor is identified as a "U.S. person" or has beneficial ownership in a U.S.-registered entity, the AIF must report this information to the Indian tax authorities, who then share it with the U.S. government.
- Investor Duty: Investors must intimate the AIF of any change in their FATCA/CRS status within 30 days of such change.
- Consequences of Non-compliance: If an investor fails to provide the requested information, the fund reserves the right to reject the application or redeem existing units of the concerned investor.
Key Takeaways for FPI and FATCA/CRS
| Feature | Requirement / Detail |
|---|---|
| IFSC Sponsor Route | Automatic route permitted for "Indian Parties". |
| GIIN Requirement | Mandatory for Reporting Financial Institutions (RFIs). |
| Rules 114F - 114H | Indian legal framework for FATCA and CRS. |
| FATCA Target | Specifically identifies "U.S. Persons". |
| Change Notification | Investors must report status changes within 30 days. |
Important Terms
- Global Intermediary Identification Number (GIIN): A unique ID issued by the US IRS to financial institutions for FATCA reporting.
- Automatic Route: A mechanism where no prior approval from the RBI or Government is required for specific foreign investments.
- Reporting Financial Institution (RFI): An entity required to maintain and report account information to tax authorities.
- Tax Identification Number (TIN): A unique number used for tax purposes in the investor's country of residence.
This concludes Part Three of the short notes for Chapter 17.D. Part Four will conclude the series with a review of regulatory sample questions and a summary of the compliance landscape for AIF Managers.