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What is FATCA and how does it affect your taxes?

You must have heard the terms FATCA and FATCA compliance before. Although it is a US law, it affects financial laws and financial institutions all over the world. Contrary to the myth of FATCA for NRIs only, it affects others too. Let’s find out what it is all about.

What is FATCA?
The Foreign Account Tax Compliance Act is a US legislation aimed at preventing US taxpayers from evading tax through offshore investments and accounts in foreign institutions. As per this law, financial institutions have to send a report of information of accounts held indirectly or directly by US persons to the US Internal Revenue Services (IRS).

What if financial institutions don’t report this information?
If a Foreign Financial Institution (FFI) does not follow the reporting and customer identification requirements, they face a 30% withholding tax.

How does it affect Indian financial institutions?
India and USA had signed an IGA (Inter-Governmental Agreement) in 2015, under which Indian financial institutions will provide information to the Indian tax authority, and the authority will then send it to the US periodically. This agreement was essentially made because of customer confidentiality rules of financial institutions.

How does it affect you?
All NRI and Indian investors must fulfil FATCA compliance through self-declaration, under which the following details are required.

  • Name
  • Address
  • PAN
  • Nationality
  • Place of birth
  • Occupation
  • Annual Income (gross)

If you are another country’s resident, the additional details required are 

  • Country’s details 
  • Tax ID number 

How are the effects of FATCA for NRIs?
If a US NRI does not have FATCA compliance, there could be severe repercussions such as NPS account blocking, bank accounts being frozen, and mutual fund investments being suspended. Thus, FATCA for NRIs becomes very crucial.

Does it affect others?
FATCA generally does not apply to non-US persons. However, in any of these cases, you might be liable to provide additional information.

  • You have a US residence
  • You were born in the US
  • You have a US address
  • You have a US telephone number
  • You have made repetitive payments to a US address or a US account
  • You have granted signatory authority or Power of Attorney to a person who has a US address
  • If your only address is a c/o or ‘hold mail’ address.

Does it directly affect your tax rates?
No, it doesn’t. It is only meant for increasing compliance.

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