What Indian Americans should know about Foreign Account Tax Compliance Act
May, 16th 2013
In January this year, the US Department of Treasury and the Internal Revenue Service (IRS) issued comprehensive final regulations implementing the Foreign Account Tax Compliance Act (FATCA). The issuance of these final regulations marks a key step in establishing the IRS' approach to combating tax evasion. And for Indian Americans, this only means more compliance. And it can get complicated so brace yourselves.
As the name suggests, FATCA provisions focus on keeping track of non-compliance by US taxpayers who hold foreign financial accounts. According to US tax code, all residents, green card holders and citizens of the US must declare and pay tax on their global income in the US In recent years, there have been several high profile indictments of US taxpayers hiding offshore income. These included multi-million value accountholders of HSBC India.
FATCA takes a two-pronged approach in tracking foreign assets of US taxpayers. First, it places the onus on US taxpayers holding financial assets outside the US to report those assets to the IRS. This reporting requirement was introduced in 2012 with Form 8938 - Statement of Specified Foreign Financial Assets and requires US taxpayers with specified foreign financial assets that exceed certain thresholds to file this form along with their federal income tax return.
The second approach, which is currently in implementation and expected to be in place by 2014, is to place the onus on foreign financial institutions to report directly to the IRS, information about financial accounts held by US taxpayers, or accounts held by foreign entities in which US taxpayers hold a substantial ownership interest.
Form 8938 has already been implemented and much has been written about it. So let's not get into the details. Let's look at the second FATCA approach and how it will impact you.
Foreign Financial Institutions to share information
This second approach basically calls for Foreign Financial Institutions (FFIs) to share information about their US account holders with the IRS. Among other things, FFIs will agree to share the following information on their US accounts:
· The name, address, and taxpayer identifying number (TIN) of each account holder who is a specified US person; · The account number; · The account balance or value; · The gross receipts and gross withdrawals or payments from the account
FFIs include banks, mutual fund companies, insurance companies and all other financial institutions. For the convenience of FFIs, FATCA has devised two options for this information sharing.
Option 1: Intergovernmental agreements (IGA)
Under this option, the IRS will sign bilateral agreements with Governments of various countries. Once this agreement has been signed, FFIs can report FATCA data to their own governments who will agree to share it with the IRS.
"Currently, India and US are working to explore options to put the IGA in place," explains Bahroze Kamdin, Partner at Deloitte Haskins & Sells, India. "If the IGA is signed, then FFIs need to share information about their US accountholders with the Indian Government and the Government in turn will share this information with IRS. There are a number of advantages for FFIs if the IGA is signed. Firstly, they will not be directly exposed to the complex laws of the US Secondly, legal impediments would not arise for sharing data outside India. And lastly, the most important advantage would be the exemption from any withholding tax provisions," she adds.
We will see what these withholding tax provisions are in the next option.
Option 2: Foreign Financial Institutions (FFIs) directly reporting to IRS
If the IGA between India and US does not get signed, then foreign financial institutions (FFIs) must agree to report directly to the IRS certain information about their US accounts or accounts of certain foreign entities with substantial US owners.
If they fail to enter such agreement, that is, if the FFIs choose to become non-participating, they will have to face 30 percent withholding tax on certain US sourced income. That means, if the non-participating Indian bank or financial institution receives any income from a US source, such as dividends or interest, the withholding agent in the US will deduct 30 percent tax on this income. The objective is to put restrictive provisions in place so that FFIs might be forced to participate.