Globalization has opened up new avenues for tax evaders to hide their income and assets in a foreign land. However, governments have realized this and are taking concrete measures to avoid tax evasion. Foreign Account Tax Compliance Act (FATCA) is one such legal measure.
Since its introduction in 2010 by the United States Tax Department, the Foreign Account Tax Compliance Act has been clouded in confusion. Several nonresident Indians have gone as long as to sell their properties in India. Such extreme measures have been taken by NRIs primarily because they have not been able to understand what assets it will impact and how they can comply with FATCA.
With this information piece, we aim to offer NRIs living in the U.S. all the necessary details about FATCA, its applicability, effects on different assets, compliance, and penalties on non-compliance. Read on to understand the implications of FATCA on you.
What is FATCA?
In 2010, The United States Tax Department rolled out the Foreign Account Tax Compliance Act (FATCA). It is a federal law that is a part of the Hiring Incentive to Restore Employment (HIRE) Act.
FATCA mandates U.S. persons (those living in the U.S. and U.S. citizens living outside the U.S.) to declare their non-U.S. investment holdings. The law also requires foreign financial institutions to report details pertaining to accounts held by U.S taxpayers. Incidences or attempts towards tax evasion by their U.S. clients should also be reported by the institutions.
This was in a bid to curb tax evasion through the means of undisclosed foreign assets. FATCA also aims to increase transparency in the system and monitor the non-U.S. financial assets of U.S. taxpayers.
Implications of FATCA in India
The success or otherwise of FATCA depends on the support of foreign financial institutions and governments. The Indian government signed the Model 1 Inter-Governmental Agreement (IGA) with the U.S. government for the implementation of FATCA in India in 2015.
Under the IGA, Indian financial institutions collect specific information from U.S. investors. The government of India also requires U.S. investors to submit a self-declaration about FATCA compliance. This information has to be shared with the highest tax authority in India, the Central Board of Direct Taxes).
The CBDT forwards the information to the U.S. Tax Department in case of FATCA violations. This information exchange between the nations is brought into effect under the Multilateral Competent Authority Agreement (MCAA), which India joined in 2015.
The declaration requires the following details –
- City/State and Country of Birth
- Gross Annual Income
- Details about the country of residence and tax ID number
The declaration helps authorities get all the required information in one place for verification.
If any of these details change, you should inform the concerned authorities within 30 days.
Does FATCA Apply to You?
FATCA applies to foreign investment holders living in the U.S.
If you fall under one of the following categories, it applies to you as well –
- Permanent resident of the U.S.
- Green Card-holders.
- NRIs who migrated to the U.S. and are now naturalized citizens of the States.
- NRIs or PIOs working in the U.S. (H1/H2, E2, and L1/L2 visa holders.)
FATCA Is Applicable on Which Investments?
The following types and categories of investments are subject to FATCA reporting –
- Fixed deposits,
- Foreign currency held in banks or financial institutions,
- Public Provident Funds (PPF),
- Mutual Funds,
- Interest from banks,
- Capital gains,
- Retirement contributions, and
- NRE, NRO, and FCNR accounts.
Note: If your accounts and assets are valued less than $50,000 at the year-end (provided their valuation never crossed $75,000 during the accounting year), they are exempt from FATCA.
These limits vary for married individuals who elect to file jointly.
The Curious Case of Property Holdings in India
Most NRIs assume that their properties (residential or commercial) in India are also subject to FATCA. However, that is not the case.
Property is not a specified asset under FATCA. This means the income earned from such assets (in the form of rent) is also outside its purview.
Thus, there is no need to sell properties in India to avoid paying tax on the income received from it. However, the income from such properties is taxable in India. Whatever income NRIs earn from immovable assets in India will be taxed in India according to the Indian regulations. This is when the income exceeds the tax-free limit in India.
Investment Assets Outside the Purview of the FATCA Lens?
Other than property holdings in India, the following assets are also not subject to FATCA reporting –
- Other collectibles,
- Safety deposit boxes,
- Foreign currency not held in banks, and
- Foreign assets help through US-based investment accounts.
How To Stay FATCA Compliant?
To stay FATCA compliant, you have to submit the details of the assets that are included under the Act through form 8938. The form is called the Statement of Specified Foreign Financial Assets.
The form needs to be filled and filed with your annual income tax return. The form can be downloaded from the website of the Internal Revenue Service here. You can also get it from public libraries, supply stores, groceries, and your accountant. Accounting software solutions for U.S. taxpayers have the file for form 8938 in-built.
The form can be mailed to the tax authorities or e-filed, depending on how you choose to file your annual returns.
Repercussions Of FATCA Non-Compliance
FATCA non-compliance can have several repercussions, which include –
- Freezing of bank accounts
- Blocking of NPS account
- Blocking of PPF account
- Suspension of mutual fund investments
- A penalty of $10,000 by the IRS (on failing to file form 8938 or filing an inaccurate or incomplete form)
NRIs should honestly file Form 8938 and adhere to FATCA regulations to avoid these penalties.
Final Words FATCA has no impact on properties held in India, and just requires reporting of bank accounts and other specified assets. It is a tax evasion avoidance measure by the U.S. government that NRIs should honestly adhere to avoid hassles.
We are sorry that this post was not useful for you!
Let us improve this post!
Tell us how we can improve this post?