Foreign Account Tax Compliance Act (FATCA) is a law aimed at preventing tax evasion by US taxpayers holding financial assets in foreign accounts. FATCA requires foreign financial institutions to report information about accounts held by US taxpayers to the US Internal Revenue Service (IRS).
What is FATCA?
FATCA is a US law enacted in 2010 as part of the Hiring Incentives to Restore Employment Act, commonly called the HIRE Act. FATCA was enacted for better transparency and to prevent US taxpayers from using foreign accounts as a way of evading taxes on income and assets. Such foreign financial institutions (FFIs) may include, but are not restricted to:
- Banks
- Investment funds
- Insurance companies
- Brokerage firms
Principal clauses of FATCA
- Encourage better tax compliance by preventing US citizens from using foreign financial accounts to evade taxation.
- Require FFIs to report information about US account holders directly to the IRS.
- Withhold a portion of payments made to non-compliant FFIs and account holders who fail to provide the required information.
- Non-financial foreign entities (NFFEs) must disclose substantial US owners or certify that they have no such owners.
- US taxpayers holding specified foreign financial assets above certain thresholds must report those assets on Form 8938.
Who is considered a US person under FACTA?
- US citizens and residents
- Domestic partnerships and corporations
- Estates other than foreign estates
- Trusts, if a US court can exercise primary supervision over the trust's administration and one or more US persons have authority to control all substantial decisions
How does FATCA work?
- FFIs register with the IRS and agree to report information about US account holders.
- FFIs identify US accounts and report the required information to the IRS or local tax authority.
- The IRS compares the information received from FFIs with the tax returns filed by US taxpayers to identify discrepancies and potential tax evasion.
To facilitate FATCA compliance, the US has entered into IGAs with numerous countries. These agreements establish a framework for FFIs to report information about US account holders to local tax authorities, who then share the information with the IRS.
Consequences for non-compliance
- Penalties: Financial institutions might incur hefty fines for failing to comply with FATCA requirements.
- Withholding tax: A 30% tax is imposed on US-sourced income for non-compliant institutions.
Also Read: Eligibility, types, & meaning of Non-resident Indian (NRI) Account
Conclusion
Since FATCA was introduced, it has greatly changed how money is handled worldwide. It makes it easier to see where US money is kept internationally, preventing people from hiding their other incomes. However, it also means that foreign banks and US people with foreign accounts must follow more rules and paperwork stringently. To avoid big financial and legal problems, it’s important for both foreign banks and United States' taxpayers to understand and follow FATCA rules.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
