The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore (out of USA) accounts.
1. U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS. US tax payers include anyone who file 1040, including , H1/L1 visa holders in USA and US citizens and green card holders, whether residing in USA or not.
2. Foreign financial institutions (FFI) will report certain information about financial accounts held by U.S. taxpayers directly to the IRS. FFI includes any institution that accepts deposits, holds financial assets for others or engaged in investing or trading in securities. In Indian context, FFI will include ALL Indian banks, NBFCs, insurance companies, mutual funds, stock brokers, etc.
Reporting by US taxpayer:
U.S. taxpayers with foreign financial assets that exceed $50,000 at year end or $75,000 at any time during the year ($100,000 and $150,000 respectively for MFJ) must report those assets to the IRS in Form 8938 starting 2012 i.e. calendar year 2011.
Timeline for FFI:
– Participating FFI to enter an agreement with the IRS by June 30, 2013
– Perform Due diligence for identifying U.S. accounts in 2013
– Report certain information about US accounts from 2014
– Withhold on U.S. source dividend & interest to non-participating FFIs from Jan. 1, 2014
– Withhold on all withholdable payments (including on gross proceeds) from Jan. 1, 2015
Due Diligence for identifying US accounts (PERFORMED IN 2013):
(1) Due Diligence for New Accounts:
A participating FFI will be required to put in place account opening procedures, including review of information provided for identification and of documentation collected under Anti Money Laundering (AML) / Know Your Customer (KYC) rules to identify U.S. accounts.
(2) Due Diligence for identifying Pre-existing Accounts:
(a) Account balance or value upto $50,000 – Exempt unless FFI elects otherwise
(b) Account balance or value between $50,000 and $1,000,000 – subject to only electronically searchable data that indicate US status of an account holder such as:
(i) Identification of account holder as a US person
(ii) US place of birth
(iii) US address
(iv) US telephone number
(v) Transfer of funds to an account maintained in the US
(vi) POA or signatory authority granted to a person with a U.S. address
(vii) US “in-care-of” or “hold mail” address
(c) Account balance or value more than $1million – review of electronic and non-electronic files e.g. inquiring account relationship manager.
FATCA came in 2010 with well thought out plan and support of major countries with phased implementation starting in 2013. FATCA is making progress slowly and steadily. While there may be delay, it will be implemented.
My expectation is that major banks in India (SBI, ICICI, HDFC, etc.) will participate in FATCA. Other banks may follow if they want to grow with US funds.
An FFI may decide not to be a participating FFI and be ready for withholding of 30%. An FFI may also decide to be a ‘deemed compliant’ FFI and return all funds and not solicit business from US residents. I noticed a filter on the website of JM Financial Services, which I expect will be a “deemed compliant” FFI.
If your bank will be a participating FFI, it will have Due Diligence process to identify pre-existing accounts in 2013 and will start reporting to IRS in 2014. Reporting will be of 2013 calendar year i.e. year starting from January 1, 2013.
As penalty could be severe, it is advisable to plan NOW, consult an advisor and comply with IRS requirements as only 3 months remain before start of 2013 calendar year.
Please click here to read my latest blog (Feb 2014) on “Comprehensive Analysis of FATCA (Foreign Account Tax Compliance Act) of USA for US based NRIs” that analyze the history and background, FATCA update, Update on US-India FATCA agreement, NRI mindset, Effect of India signing FATCA, etc.