FATCA (Foreign Account Tax Compliance Act) is an act enacted by US in 2010 to combat tax evasion by US nationals holding investments in foreign countries. It is an Inter Governmental Agreement (IGA) signed by US with 68 countries.
- It allows automatic exchange of financial information of each other country’s citizen.
What it says?
It requires financial institutions to share financial activities of their US customers with US government and vice-versa. It bounds US to provide information of Indian account holders in US and Indian government will provide similar information to US.
What if Financial Institutions do not comply FATCA?
If financial institutions do not comply with provisions of the ACT, then they have to suffer 30% withholding tax.
Let’s say SBI has business dealing with US based company Microsoft. Microsoft was scheduled to pay Rs 100 crore to SBI. Let’s see what happens if SBI does not comply with FATCA
| FATCA Compliance |
Amount SBI will receive |
| Yes |
Rs 100 Crore |
| No |
Rs 70 Crore |
Thus SBI have to pay Rs 30 crore as withholding tax.
How to share information?
The act has introduced two models of sharing information:
- Model A: The financial entity shares information with its local tax department which in turn transmit information to US government. India is signatory under this Model.
For example, SBI share info => CBDT => US government
- Model B: The financial entity shares information directly with US government.
Exemptions
| Investment Amount |
Information Sharing |
| Less than $50,000 |
Not required |
| Greater than $50,000 |
Yes, required to be shared under FATCA |
Thus sharing of information is exempted for individual/entity investment less than $50,000 in other country.
Advantages
- It will help fight menace of black money
- There will transparency in taxation of global investments
- It enables USA to access financial activities of its citizens in other countries
Impact of FATCA on India
- NRI’s may find it difficult to invest in India.
- It will allow Indian tax authorities to detect hidden assets of Indians in US.
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