Foreign Account Tax Compliance Act & Common Reporting Standard
What is FATCA?
Foreign Account Tax Compliance Act (FATCA) is a federal law in the United States (US) which is aimed at detecting and combating tax evasion by US taxpayers. FATCA is designed to prevent tax evasion by US citizens using offshore banking facilities. It requires FIs outside the US to provide information to the US tax authorities regarding financial accounts held by US nationals. FIs who do not agree to provide this information will suffer a 30% withholding tax on payments of US source income
FATCA requires certain US taxpayers holding financial assets outside the US to report such assets to the Internal Revenue Service (IRS) vide form 8938. FATCA also requires certain Foreign Financial Institutions (FFI) to report directly to the IRS information about financial assets of US taxpayers.
FFI includes: an entity that accepts deposits in the ordinary course of a banking or similar business (Depository Institution); holds financial assets for the account of others as a substantial portion of its business (Custodial Institution); engages primarily in the business of trading in financial instruments, managing portfolios or otherwise administering or managing funds or money (Investment Entity); or conducts certain business as an insurance company (Specified Insurance Company). This includes not only banks, insurance companies and broker-dealers but also extends to trusts and trust companies, hedge funds and private equity funds
Thus, FATCA promotes cross border tax compliance by implementing an international standard for the automatic exchange of information related to US taxpayers. FATCA regulations require tax authorities obtain detailed account information for US taxpayers on an annual basis.
FATCA is intended to increase transparency for the Internal Revenue Service (IRS) with respect to US persons that may be investing and earning income through non-US institutions. While the primary goal is to gain information about US persons, FATCA imposes tax withholding where the applicable documentation and reporting requirements are not met.
UK has entered into an Intergovernmental Agreement (IGA) with the US, which enables UK FIs to provide information required to be reported under FATCA directly to HM Revenue & Customs (HMRC), which then reports the information to the US Internal Revenue Service.
Many other governments, including those of the CDOTs have entered, or are entering into, similar agreements with the US. The UK has also entered into similar agreements with the CDOTs so that HMRC can find out about offshore accounts held by UK residents.
FATCA and India
Indian and the US signed an Inter-Government Agreement (IGA) on 9 July 2015 to implement FATCA. As a result, FFIs in India will be required to report tax information about US account holders directly to Indian Government which will, in turn, relay that information to the IRS on an automatic basis. As a result, RBI has advised banks and financial institutions to register with US authorities in order to comply with FATCA. Similarly, all financial intermediaries who handle investments in India for NRIs living in US are covered under FATCA.
The government in India in February 2018 introduced the Finance Bill 2018—containing a proposal to amend section 271F of the Income-tax Act that lists the penalties for the late filing of certain reports, including the FATCA-CRS (common reporting standard) return (Form 61B).
Impact of FATCA on NRIs living in US
As per FATCA, NRIs filing tax returns in the US and holding foreign financial assets with aggregate value above the threshold limit are required to report information about such assets in Form 8938 along with their annual income tax return. However, if the specified foreign financial assets are reported in other forms, then they are exempt from being reported a second time in Form 8938. Non-compliance with filing form 8938 will result in penalties.
In India, NRIs having bank accounts in India or holding mutual funds in India are required to file a self-declaration FATCA form with such banks and financial institutions. The self-declaration FATCA form is not standardised but generally requires details such as name, PAN, address, place of birth, country of birth, nationality, country of residence, tax ID number etc. In case of non-compliance of filing FATCA declaration, banks and financial institutions may freeze and block accounts of NRIs for which FATCA declaration has not been submitted.
Foreign Account Tax is meant only for US persons with threshold-limited accounts in India. Assets include investments and partitioned/inherited family assets in India
- Individuals with bank or investment account balance above $50,000.
- US person living in India with bank or investment account balance above $2,00,000.
- Entities with bank or investment account balance above $2,50,000.
- Immovable properties like land or house property, and personal assets like jewellery are not covered by FATCA
- Investment in partnership or proprietorship firm not included and not reported.
What is CRS?
Common Reporting Standard (CRS) , developed by the Organization for Economic Cooperation and Development (OECD), is a Common Reporting Standard (CRS) , developed by the Organization for Economic Cooperation and Development (OECD), is a global reporting standard for the automatic exchange of information (AEoI) on a global level. The goal of CRS is to allow tax authorities to obtain a clearer understanding and insight into data regarding financial assets held abroad by their residents, for tax purposes. on a global level. The goal of CRS is to allow tax authorities to obtain a clearer understanding and insight into data regarding financial assets held abroad by their residents, for tax purposes.
CRS is a much broader information reporting regime. CRS provides a framework for jurisdictions to obtain information from their FIs and automatically exchange that information with other jurisdictions on an annual basis.
CRS requires financial institutions to identify and report accounts held by persons who are tax resident in member countries. Where account holders refuse to be identified, financial institutions are required to report them based on information available. As a result of CRS, individuals will have to make additional disclosures to their financial institutions via a self declaration.
The financial insitutions will then determine whether the individual has any connection with CRS jurisdiction countries and make necessary disclosures to the CRS jurisdiction countries. As of January 2018 there are 98 signatories to the CRS MCAA, including India.