What is FATCA and How does it affect India?

What is FATCA ?

Foreign Account Tax Compliance Act (FATCA) was enacted by the US in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act to combat tax evasion by US nationals holding investments in foreign accounts. FATCA requires all Foreign Financial Institutions (FFIs) to provide information about their US customers.

FATCA aims at tracking investments made by US citizens outside the US and bringing this under the US tax net and thus combat tax evasion. If foreign financial institutions do not comply, they will suffer a 30% withholding tax. Let us take an example of a bank in India, which invests or does business dealings with entities in USA. If this bank wants to continue its business transactions with USA it must sign the Information Reporting Agreement under FATCA or suffer a penalty of 30% withholding tax which will be imposed on all payments it has to receive from the U.S. entity.

US Treasury published the Model Inter Governmental Agreement (IGA) for simplified reporting and identified countries which were to be under the ambit of FATCA. USA identified India as one of the 50 countries or jurisdictions for FATCA agreement.

The Indian government is to sign the IGA under Model A. Under Model A, entities will have to give information to their regulators, which will provide it to the Central Board of Direct Taxes (CBDT). Later, the government will give all the information to USA.

The IGA would be signed only after the approval of cabinet. India has a month more to sign it. Meanwhile,  RBI advised banks and financial institutions to register with US authorities and obtain a Global Intermediary Identification Number (GIIN) by 31 December 2014 to enable them to comply with the requirements under FATCA. The situation has arisen because India and the US reached an agreement in substance on the terms of the IGA earlier this year and India is already treated as having an IGA in effect from April 11, 2014.

How does FATCA affect India ?

Since FATCA will affect any foreign investment vehicle that receives directly or indirectly, any US source income, it is expected that sooner or later all Indian financial institutions will align themselves with the FATCA norms.

» NRIs – There is an apprehension that their inflows will decrease. Infact there have been reports of large fund houses barring NRIs from investing in their schemes to avoid unnecessary reporting.

» DTAA- FATCA issue – India and USA signed DTAA in 1990. The treaty prescribes lower withholding rates. SEBI has voiced concern regarding this recently. SEBI also raised concerns on penal provisions and  lack of symmetry in reporting standards.

» Impact on Banks – To ensure compliance of FATCA, banks will have to revamp their KYC norms.

» Impact on investments – For anyone investing directly or indirectly in American assets and securities, it will be a cumbersome procedure to do all the reporting. Investment banking firms will have to enhance systems to capture additional data for standard report generation.

Given the nature of FATCA regulation, the Indian regulatory authorities may be required to play an important role to safeguard the Indian industry against undue exploitation.