With globalization, people got more freedom to move for career and business opportunities, easily move their capital, and earn income from their investments on a global scale. On one hand, it was a good sign that the global economy is integrating. On the other hand, it also means that people would find new ways to stash their wealth abroad and avoid paying taxes in the country where they are tax residents.
What Is FATCA(Foreign Account Tax Compliance Act)?
As the problem of tax evasion reach mammoth proportions, the United States of America brought in the Foreign Account Tax Compliance Act or the FATCA. This 2010 law allowed the Internal Revenue Services (IRS, the Income Tax department of the USA) to access and share information from its counterparts across the world and nab tax evasion and money laundering.
Must Read – How NRIs can complete KYC for NRI Mutual Fund?
The stated objectives of FATCA seek to eliminate tax evasion by US individuals, businesses, and tax residents (collectively called US persons) that are investing, operating and earning taxable income abroad. Financial institutions can withhold tax as per US rates if a US person refuses to meet the FATCA documentation requirements.
With detailed information sharing between the tax agencies, it is expected that more taxpayers will willingly declare their taxable income and pay their dues. This requires the US to sign IGAs (Inter-Governmental Agreements) with cooperating countries. So far, the US has signed IGAs with eight dozen countries.
To balance the FATCA, the US also has signed Double Taxation Avoidance Agreements (DTAA) with countries, including India. the DTAA allows a taxpayer to avoid paying double tax on their incomes originating in both countries and pays taxes only in one of them. The tax residency for this purpose is computed by seeing in which of the country did the taxpayer had resided for the most part of the year and earned her income.
US-India IGA for FATCA
The RBI in its June 27, 2014, communique to all commercial banks advised that all banks should follow the FATCA compliance on and after April 11, 2014. Similarly, the SEBI issued the dispatch to stock exchanges, brokers, mutual fund houses, portfolio managers, depository participants, and other capital market intermediaries to the same effect. The Income Tax Act was amended in 2014 and rules 114F to 114H and Form 61B were added to accommodate FATCA.
Financial entities in India, (Foreign Financial Institutions or FFI in FATCA terminology) are now required to report financial transactions and holding related to US persons to the Central Board of Direct Taxes (the governing body of the IT department). The CBDT, in turn, after collating shares this information with the US IRS.
According to the FATCA requirements, US persons holding foreign financial assets worth more than a certain threshold (starts at USD 50,000) must report such holdings on form 8938 to IRS. While filing their annual tax returns. The FFIs will report about the financial accounts held or about the substantial ownership interest of US persons. The details shared by the CBDT with the IRS include:
- Identification of US account holders.
- Reporting specified information on such account holders to the IRS annually.
- Withholding tax on incomes of recalcitrant taxpayers and even close their accounts.
Non-compliant FFIs also face withholding of 30% tax on any income or capital originating in the US – whether belonging to them or their clients.
As the FATCA is an information-sharing mechanism, India also gets its share of financial holding and transaction information from the IRS on tax-residents of India having a financial interest there.
So, with strict action against both the account holders and the financial institution, FATCA encourages transparency, reporting, and tax compliance at a global level. With a FATCA compliance institution, investors also feel more confident and do not have to worry IRS or the IT department visiting them.
Must Read – NRI Tax in India on Indian Income
Impact of FATCA Declaration for NRIs
All new and existing investors of any financial institution were required to file a FATCA self-declaration form starting January 1, 2016. The self-declaration form asks:
- Taxpayer’s Name
- Indian Address
- Place of birth
- Gross Annual Income
- If you are a tax-resident of another country? If yes, then the name of the country, TIN (Tax ID Number), and taxpayer category.
If you are a US citizen or a US green card holder, then you must explicitly state the USA as one of your countries of residence. It means even you are a tax resident in India you must still mention that the US as a country of residence. This may seem like an anomaly, but it is clarified in the rules 114F-114H of the IT Act.
Therefore, NRIs living in the US with assets and investments in India must declare their Indian income in the US tax returns. This is required even if their Indian income is tax-exempt, as they may be liable to pay taxes in the US. Filing detailed and meticulous information in your US tax returns may, therefore, prevent any inquiries or objections from the IRS.
Documents Required for FATCA & CRS Declaration
The FFIs located in India are required to ask their NRI clients living in the US (US persons) to submit the self-attested copies of the following documents:
- PAN Card
- Voter ID or Aadhaar card
Investments in India under FATCA
When the FATCA was initially under implementation, from 2014 to 2016, there was confusion and chaos everywhere. Suddenly the most lucrative class of NRI clients – those living in the USA – became something to avoid. The confusion was so much that many NRIs wanted to sell off their Indian investments and properties before the FATCA regulations came into force. This was all due to miscommunication and misinformation on part of tax authorities of both countries, with some intermediaries adding fuel to the fire.
Many FFIs still find dealing with US persons (NRIs) a problem or burden and are reluctant to enter a relationship with them. This has added to the confusion that FATCA disallows US persons to invest in and earn from their overseas entities and properties. Some people are under impression that FATCA prohibits international transactions between US and non-US entities/financial institutions.
The fact of the matter is that FATCA has no provision for prohibiting NRIs or others from investing in any financial asset in India – equities, debt, or MFs. It does not prevent them from investing in properties and earning rental income on them. FATCA does not prohibit them from starting a business or entering any financial contracts here.
Instead, FATCA ensures that individuals, businesses, and financial institutions report/disclose their holding, investments, and transactions fully, timely, and properly. It ensures such compliance by imposing a harsh tax on any income originating in the USA.
To reduce their compliance burden, initially, most mutual fund houses stopped taking investments from US and Canada resident persons/entities. This has reduced to a great extent as 35 out of 44 mutual fund houses were FATCA-compliant as of November 2021.
What is CRS?
The Common Standard on Reporting (CRS) is an international version of FATCA introduced by the Organisation of Economic Cooperation and Development (OECD). CRS applies to citizens of every registered country.
Difference between FATCA and CRS
While both FATCA and CRS aim to prevent offshore investors from avoiding taxes and cash hoarding, there are some notable differences between the CRS and FATCA
|FATCA concerns only people living in the USA||CRS covers 90 countries (excluding the US)|
|Reporting of all financial accounts is not Mandatory||Reporting your financial accounts is compulsory under the CRS|
|Individual account should have more than $50,000 balance||No Minimum limit under CRS|
|Number of US people reported under FATCA are only a few thousands||Several millions of accounts are reported under CRS|
If you have any questions or observations regarding FATCA – add them in the comment section.