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Posted by: Girija Gadre on Fri, Oct 17th, 2014

Impact of FATCA on investments by US persons

 

FATCA or Foreign Account Tax Compliance Act is a US legislation passed in 2010. It targets US persons (US citizens or US residents) who have accounts overseas but fail to report details with respect to these accounts. It is aimed at addressing and combating tax abuse by U.S. persons through the use of offshore accounts.

 

FATCA places the responsibility on the institutions that enable transactions of US persons, to identify, report and recover taxes that may have been evaded through such offshore arrangements.  The Inter Governmental Agreement (IGA) that US has signed with countries, including India implements these requirements at the local level. Non compliance with these norms call for penalties as well as 30% withholding taxes on the payments made to such persons from the overseas financial institutions.

 

When does FATCA begin to apply?

 

India has reached an Inter Governmental Agreement (IGA) with the US to implement FATCA with effect from April 11, 2014.  According to the IGA, Indian Financial institutions including RBI and SEBI registered institutions such as banks, mutual funds are required to register with US authorities under FATCA by December 31, 2014. These institutions will be bound to provide details of accounts of US persons maintained with that institution.  

 

How do investments in Indian mutual funds come under FATCA purview?

 

In view of the above, Asset Management companies are required to register with US Authorities under FATCA. AMCs would be required to collect information or certification from the investors as required. AMCs will also be required to report information on the holdings or investment returns of investors to the US authorities. Also, the AMCs will be required to apply withholding tax on payments to investors who fail to provide information or documents required under FATCA. Applications that do not provide the necessary information or certifications are liable to be rejected.

 

To whom does FATCA apply?

 

The following persons fall under the FATCA purview. It includes an individual with:

 

•     U.S. citizenship or lawful permanent resident (green card) status;

•     A U.S. birthplace;

•     A U.S. residence address or a U.S. correspondence address (including a U.S. P.O. box);

•     Standing instructions to transfer funds to an account maintained in the United States, or

•     directions regularly received from a U.S. address;

•     An “in care of” address or a “hold mail” address that is the sole address with respect to the client; or

•     A power of attorney or signatory authority granted to a person with a U.S. address.

 

Having one of these identities does not mean that the account is owned by a U.S. person, only that it must be given closer scrutiny. Such persons are required to submit additional documents prescribed under these laws.

 

What happens to the investments?

 

Investments by US persons in Indian mutual funds remain intact. However, if such persons do not comply with FATCA reporting requirements, any payment made to them may be subject to a withholding tax. Such investors will also be required to provide additional documentation and certifications to the Indian financial institution where it holds an account.

 

What information shall be collected under FATCA?

 

The information which must be collected from US account holders is:

 

1.    the name, address, account number and taxpayer identification number of each account holder

2.    that person's account balance or value at year end

3.    the gross dividends, interest or other income paid or credited to that account

 

This information has to be reported by the institutions registered under FATCA, to the US tax authorities. They will cross check this date with the tax returns filed by US persons, to check evasion.

 

What is required to be done by US persons to be compliant?

 

Reporting of overseas accounts and investments by US persons is key under FATCA. Reporting must be done in the prescribed forms under FATCA (Form 8938).

 

Is there any threshold for being covered under FATCA?

 

Taxpayers with a total value of specified foreign financial assets below a certain threshold do not have to file Form 8938.

 

•     If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year

•     The threshold is higher for individuals who live outside the United States

•     Thresholds are different for married and single taxpayers

•    Taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets.

 

For further information on FATCA please visit the following links:

 

http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-FATCA

http://rbi.org.in/scripts/NotificationUser.aspx?Id=8970&Mode=0

http://www.punestockexchange.com/admin/downloads/7152681401404807408.pdf

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