FATCA Declaration 

Table of Content

1. Who is Considered a US Person Under FATCA?

2. Impact of FATCA Provisions on Indian Financial Institutions

3. Impact of FATCA Provisions on NRI Investors

4. Conclusion

5. Frequently Asked Questions

FATCA is a U.S. law enacted in 2010 to combat tax evasion and increase transparency regarding offshore financial assets with an aggregate value of over $50,000. Its primary purpose is to ensure that US taxpayers disclose foreign accounts and income. 

So, understanding what is FATCA declaration is will enable you to comprehend the following key provisions:

• Foreign Financial Institutions (FIIs) must report US account holders to the IRS. 

• US taxpayers with specified foreign assets must report them using Form 8938. 

• Failure to furnish the required information in Form 8938 will attract a penalty of $10,000. An additional penalty of $50,000 will be imposed if the information is still not provided after the IRS has issued its notification. 

• Non-compliant institutions face withholding penalties of 30% on certain U.S.-source payments. 

Who is Considered a US Person Under FATCA?

The term “US persons” extends beyond American citizens under FATCA provisions. It covers a broad range of individuals and entities with tax obligations in the United States. Specifically, a US person includes:

• US Citizens: Anyone born in the US or naturalised as a citizen, even if not residing in the country. 

• US Residents/ Green Card Holders: individuals who meet the substantial presence test or have a valid green card. 

• US Domestic Corporations, Partnerships and Trusts: Businesses or legal entities organised under US laws or controlled by US persons. 

• Others as Defined by the IRS: Certain estates, retirement accounts, and entities treated as US taxpayers under specific IRS guidelines.

How FATCA Works in India

Knowing about what is FATCA declaration and how it works in India will be beneficial for Indians. India and the US signed the Intergovernmental Agreement (IGA) in 2015 to ensure compliance with FATCA declarations. 

This enables the Indian government to incorporate FATCA provisions into domestic tax regulations through Rules 114F to 114H of the Income Tax Rules, 1962. As a result, Indian financial institutions must identify and report information about US persons holding specified financial accounts in India.

To operationalise this, the government introduced Form 61B to provide legal basis for maintaining and reporting information about Reportable Accounts. This facilitated the reporting of specified financial transactions to the Indian Income Tax Department for onward transmission to US tax authorities. 

Since January 2016, Non-resident individuals opening new financial accounts in India have been required to submit a self-declaration containing all FATCA details and their tax residency status. This will ensure the maintenance of tax transparency and compliance for both countries.  

Apart from the FATCA declaration, India also introduced the Common Reporting Standard (CRS). This is a global standard for information exchange among tax authorities worldwide. It helps in overcoming tax evasion and system integrity. 

Therefore, FATCA and CRS strengthen tax transparency, deter offshore tax evasion, and ensure compliance with international reporting standards. 

Impact of FATCA Provisions on Indian Financial Institutions

Understanding what is FATCA declaration has transformed the operations of Indian financial institutions. Here is the impact of this declaration on Indian financial institutions: 

• Registration with the IRS

All eligible institutions, including banks, insurance companies, and mutual funds, must register with the US Internal Revenue Service (IRS) to obtain a Global Intermediary Identification Number (GIIN) as per Rule 114G(9) of the Income Tax Rules, 1962. This registration enables them to report account details of U.S. persons in accordance with FATCA regulations.

• Identification and Reporting of US Accounts

Financial institutions must conduct thorough due diligence on existing and new clients to identify US accounts as per Rule 114H of the Income Tax Rules, 1962. This involves collecting self-declarations, validating tax identification numbers, and maintaining accurate records for reporting the same by submission via Form 61B to Indian tax authorities as per Rule 114G of the Income Tax Rules, 1962.

• Compliance Procedures

Institutions are required to implement internal systems to monitor reportable accounts and train staff to manage FATCA obligations efficiently, ensuring smooth operations.

• Consequences of Non-Compliance

Failure to follow the FATCA regulations may result in a 30% withholding tax on US-sourced income, financial penalties, reputational damage, and restrictions on global operations as per the US Tax Laws. Compliance is therefore essential for maintaining credibility and ensuring uninterrupted business operations.

Impact of FATCA Provisions on NRI Investors

FATCA has significant implications for NRI investors in India, affecting their ability to access and manage various financial products while ensuring compliance with US tax laws. Here is the impact on NRI investors:

• Mutual Funds

NRIs investing in mutual funds must submit FATCA self-declarations to confirm their US tax residency status. This ensures that financial institutions can accurately report relevant account information to tax authorities. 

• Life Insurance Policies

Life insurance plans with investment components require NRIs to provide compliance documentation, validating their tax status under FATCA regulations before policy issuance or premium acceptance. 

• National Pension Scheme (NPS)

The NPS requires FATCA self-certification from NRIs before contributions are accepted or accounts are activated, ensuring compliance with reporting requirements for US persons.

• Required Documentation

Typically, NRIs are required to provide self-declaration forms, tax identification numbers, and valid identification documents. Failure to furnish accurate details may result in account restrictions or investment rejections.

Conclusion

Understanding what is FATCA declaration plays a crucial role in promoting global tax transparency and curbing offshore tax evasion. For Indian citizens, NRIs, and financial institutions, understanding the provisions and meeting compliance requirements is essential. These requirements include self-declarations, accurate reporting, and adherence to IRS regulations.

Non-compliance can result in severe penalties and withholding taxes, making timely action crucial. To navigate FATCA effectively, individuals and institutions should consult a qualified financial advisor for personalised guidance based on their specific financial profiles. For further details, refer to official resources, such as the IRS website, the Indian Income Tax Department guidelines, and advisories from trusted financial institutions.

Frequently Asked Questions

1. What is the FATCA used for?

The primary objective of FATCA is to prevent tax evasion by requiring disclosure of offshore financial accounts held by US taxpayers. A FATCA declaration compels financial institutions to disclose information about US taxpayers. 

2. Is FATCA mandatory in India?

Yes, a FATCA self-declaration is mandatory in India after January 2016 after the issuance  of Notification No. 62 of 2015 dated 7th August 2015, for Indian citizens and NRIs. The Indian government introduced Form 61B and Rules 114F to 114H to comply with FATCA regulations. 

3. Is FATCA part of KYC?

Financial institutions often integrate FATCA with KYC procedures to verify tax residency and ensure regulatory compliance. Consequently, FATCA is considered to be an extension of the KYC Form. 

4. What happens if I don’t comply with FATCA?

Failure to comply with FATCA regulations can result in a 30% tax withholding on certain payments from the US as per US Tax Laws. Therefore, foreign financial institutions and banks must disclose information about US accounts to avoid this penalty.