Brief history and background
If you are a US resident, citizen or a green card holder (also includes US expats staying outside the US) you are required by law to declare your global income to the US government and also comply with certain regulatory compliances as required by the IRS and other US regulatory bodies.
The IRS has observed that in recent years, there have been several instances of very high net worth individuals hiding income offshore with a view to evade taxes.
The Foreign Account Tax Compliance Act, commonly known as FATCA became a law in 2010 with the objective to detect and therefore discourage tax evasion by people who have a reporting requirement with the IRS.
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Whom is FATCA applicable to:
FATCA is applicable to a US person. A US person is
- A citizen or resident of the United States (including a green card holder).
- A partnership, corporation, estate, trust incorporated or created under U.S. law
(U.S. incorporated entity)
- US birth place
- A US residence address or a US correspondence address including a US PO box.
- Standing instructions to transfer funds to an account maintained in the US or directions regularly received from a US address.
- An ‘in care of’ address or a ‘hold mail address’ that is the sole address with respect to the client or
- A power of attorney or signatory authority granted to a person with a US address.
Phase 1 – Individuals
The first phase of FATCA has already been implemented from the reporting year 2011, whereby US individual tax payers have to report information about certain foreign financial accounts and offshore assets on Form 8938 and attach it to their income tax return, if the total asset value exceeds the appropriate reporting threshold. To read more on Form 8938, click here…
Phase 2 – Financial Institutions and Government
Foreign Financial Institutions to share information
Foreign Financial Institutions (FFIs) need to share information about their US account holders with the IRS. FFIs include banks, mutual fund companies, insurance companies and all other financial institutions.
As per the communication issued to all commercial banks on 27 June, 2014, the Reserve Bank of India (RBI) has advised that governments of India and US have reached an agreement in substance on the terms of an Inter-Government Agreement (IGA) to implement FATCA and that India is now treated as having an IGA in effect from 11 April 2014. The IGA, however, would be signed only after the approval of cabinet. RBI has, therefore, inter-alia 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.
Similar instructions have been issued by market regulator Securities and Exchange Board of India (SEBI) also on 30 June, 2014 to the capital market intermediaries, including stock exchanges, stock brokers, mutual funds, depositories, depository participants and portfolio managers. In effect, it applies to all financial intermediaries who handle investments in India by non-resident Indians (NRIs) living in the US.
FATCA requires all foreign financial institutions (FFI) to report information about financial accounts held by US taxpayers and or foreign entities in which US taxpayers hold a substantial ownership interest. In short, FATCA will require FFIs to enter into an agreement with the US Internal Revenue Service (IRS) whereby they agree to:
• identify their US account holders;
• report certain information of such account holders annually to the IRS; and
• withhold tax on payments to recalcitrant US taxpayers and to non-participating FFIs and close accounts belonging to recalcitrant account holders.
If FFIs do not comply, they will suffer a 30% withholding tax on payments of US source income or capital into their institution, irrespective of whether payments are made to the institution itself or on behalf of its clients.
How does FATCA impact US Expats who have permanently moved to India?
Although you are a US Expat who has moved back to India permanently, you need to disclose your global income to the IRS every year. This will be by filing your tax returns every year, attach Form 8938 if applicable and disclose correct information to the Indian Financial Institutions who will now have a disclosure requirement with the IRS.
Even though you may be declaring your income and paying taxes in India, you still need to go ahead and also comply with the necessary US regulatory requirements as well. However, don’t worry, declaring your income in the US does not mean paying double taxes again to the US government. India had signed a double taxation avoidance agreement (DTAA) with the US which helps to avoid the incidence of double tax and ensure that you are not taxed twice on the same income.
How does FATCA impact NRIs staying in the US ?
If you are a NRI staying in the US, once you become a resident, green card holder or a US citizen, you need to disclose your global income to the IRS every year. Make sure you file your tax returns every year, file Form 8938 if applicable and also provide correct information to the Indian Financial Institutions who will now have a disclosure requirement with the IRS.
What if I have not been complying with these requirements in the past years ?
Even if you have not been complying with these requirements in the past, it is advisable to streamline your compliances at the earliest and be up to date with the US reporting requirements.
I have already paid taxes to the Indian Government. Will I be taxed again by the IRS ?
Disclosing your income does not mean paying taxes on that income twice. India has signed a Double Taxation Avoidance Agreement (DTAA) with the US which will help to avoid the incidence of double taxation.
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