If you are a US citizen residing in India, your Indian banks must have probably issued you some forms requiring disclosure under FATCA requirements. These forms look like an extended KYC (know your customer) form with a lot of additional requirements. It is natural to be confused by looking at the disclosure requirements in those forms. A lot of people are not even sure if they should be disclosing all their US identities to Indian banks in the first place.
So, in this article, let me try and answer some of the questions which you may have regarding FATCA. We will go over FATCA compliances in a little detail. This article will mainly focus on understanding:
- The background and the purpose behind the introduction of FATCA
- What is FATCA?
- What disclosure requirements are US citizens/ US persons required to make under FATCA?
- What are the reporting requirements of the Foreign Financial Institutions (FIIs) towards the IRS under FATCA?
Why was FATCA introduced?
The background
There are a vast number of US citizens who reside in foreign countries (outside US). Being US citizens, they are subject to certain US tax rules and regulations. One of them is that a US citizen is required to disclose his global income on his US tax return. A lot of citizens, once they become US citizens return to their country of origin and settle down. Advertently or inadvertently, they never file their US tax returns or do not disclose their income earned in a foreign country to the IRS. As a result, the IRS is losing billions of dollars in tax revenue.
In order to have tight control measures, the IRS has come up with certain disclosure requirements by individuals (and businesses) as well as the institutions in which they have parked their investments. These disclosures are required by the introduction of FATCA which stands for “Foreign Account Tax Compliance Act”.
What is FATCA?
As discussed above, FATCA stands for “Foreign Account Tax Compliance Act”.
The purpose of this act is to focus on deliberate or fraudulent instances of tax invasion by US citizens/ residents by income generated in foreign countries.
What are the disclosure requirements that US citizens/ US persons required to make under FATCA?
US citizens/ US persons are required to make the following disclosures to the IRS:
- File their FBAR each year (discussed in a separate article here)
- File Form 8938 along with their US tax return (discussed in a separate article here)
- File the FATCA form and make the required disclosures to the financial institutions in India (such as banks, mutual funds etc)
What are the disclosure requirements with the financial institutions under FATCA?
You may be required by banks and financial institutions to provide details on your country of residence, Tax Identification Number (TIN or equivalent), country of birth, and citizenship.
What are the reporting requirements of the Foreign Financial Institutions (FIIs) towards the IRS?
Foreign Financial Institution (FIIs) are required to register with the IRS. These include banks, mutual funds, custodial and depository institutions, investment entities and specified insurance companies.
The IRS has signed FATCA agreements with over 75 countries. As per these agreements, the FIIs are required to transmit certain information to the IRS regarding the account balances of US persons. The penalties for FFIs for non-compliance are severe. They will have to pay 30% tax on all US source payments like interest, rent, salaries, and dividend generated from US sources.
Should you make all the FATCA disclosures with the Foreign Financial Institutions (FIIs)?
A lot of individuals have not yet made the required disclosures to their financial institutions. They are still contemplating whether they should disclose their US identity to the Indian banks. Please note that non-disclosure of information can lead to very dangerous consequences. The IRS will tie up all the information provided in your US tax return, FBAR, Form 8938 and the information provided by the FIIs. Non compliance can lead to severe penalties and at times can even exceed your account balance.
