Foreign Account Tax Compliance Act – FACTA

Governments of all major countries recently agreed to share financial information to help over the problem of tax evasion by holding foreign investments and accounts. Every government wants to keep track of the income and investment of its residents to prevent them from evading taxes. But incomes and investments housed in foreign shores are not disclosed by residents and result in tax evasion.

The US put together a law called Foreign Account Tax Compliance Act (FATCA) in 2010. The objective was to get U.S citizens and residents to report their financial assets held outside in country to the Internal Revenue Service (IRS, the US tax authority)

FATCA relies on foreign financial institutions like banks, mutual funds, stock brokers that hold assets of such taxpayers to disclose the details to the IRS. The reporting threshold is $ 50,000 in foreign financial assets. This limit varies with tax payers citizenship, resident and marital status.

FATCA imposes a 30% withholding tax on non-compliant FFIs, that is payment and receipts sourced from the US would suffer a sharp cut. However at the same time, reporting by FFI to IRS could be cumbersome on account of data protection laws in their country. As an alternative, many governments have entered into agreements with the U.S, so that FFI pass on the information regarding US based clients to local tax authorities , which share the information with IRS.

Indian government has entered into a reciprocal agreement with the US to receive information from the US regarding assets held by Indian tax assessee in that country. From January 2016, SEBI has made it mandatory for Indian investors to comply with FATCA requirement. So mutual funds and other financial institutions are expected to collect information such as investor’s country to tax residence, tax identification number. Indian investors have to provide FATCA self certification form and meed additional KYC norms

CA. Roshan Thomas