Since the Foreign Account Tax Compliance Act (FATCA) came out in 2010, US Government has already signed Bilateral Agreements with 9 countries until June 2013. The November 8, 2012 Press Release mentioned that the US is engaged with more than 50 countries (including India) to implement FATCA. After analyzing all 9 bilateral agreements entered till date with UK, Denmark, Mexico, Ireland, Switzerland, Norway, Spain, Germany and Japan, I have pretty good idea about what will be included in the US-India FATCA Agreement.
Based on review and research of all 9 agreements, I would assume that the US and India FATCA agreement would include 10 Articles and two Annexes as under:
Article 1 – Definitions
Article 2 – Obligations to obtain & exchange information with respect to reportable account
Article 3 – Time & manner of exchange of information
Article 4 – Application of FATCA to respective countries’ Financial Institutions
Article 5 – Collaboration on compliance and enforcement
Article 6 – Mutual commitment to enhance effectiveness of info. exchange & transparency
Article 7 – Consistency in application of FATCA to partner jurisdiction
Article 8 – Consultations & Amendments
Article 9 – Annexes
Article 10- Term of Agreement
Annex I: Procedures for identifying and reporting on US Reportable accounts and on payments to certain non-participating financial institution
I. General
II. Pre-existing Individual Accounts
A. Accounts not required to be reviewed, identified or reported
B. Review procedures for accounts with balance or value over $50,000 to $1 million
C. Additional procedures for lower value accounts
D. Enhanced procedures for accounts with balance exceeding US$ 1 million
E. Additional procedures for higher value accounts
III. New Individual Accounts
IV. Pre-existing Entity Accounts
V. New Entity Accounts
VI. Special Rules and definitions
Annex II: Non-Reporting countries’ Financial Institutions and Products
I. Exempt Beneficial Owners
II. Deemed Compliance Financial Institutions
III. Exempt Product
Switzerland and Japan entered into Model-2 intergovernmental agreement with the US whereas all other countries entered Model-1 intergovernmental agreement. The articles and annexes above are from Model 1. Articles under Model-2 covered all major provisions and both Annexes, but may have different titles for Articles .
If you want to understand the provisions, just open any intergovernmental agreement (e.g. UK or Germany) and cut and paste that country’s name with India and you will have a good idea about what to expect from the US and India FATCA agreement.
A lot of NRIs are still in denial hoping that India may not enter into an agreement and their accounts may not be reported. To them, I just want to tell that if Switzerland, one of the most secretive banking jurisdiction, has entered into an agreement, there are pretty good chance that India will as well. Also, there are so many examples of NRIs being charged, fined and imprisoned for failure to comply with FBAR reporting requirements. FATCA is the next step.
So the question is not “If” but it is “When” India enters into an agreement with the USA. It is just a matter of time. And, it is VERY VERY important for NRIs to ditch the habit of “Wait and Watch” or “I am not the only one” or “Let’s see what happens to others” or “will face when it comes” and be proactive NOW to understand the implications of the FATCA on their investments in India or anywhere outside USA. Else, it could be too late.
For now, the most important and relevant FATCA provisions for NRIs to comprehend are few definitions, reporting date and time, consistency, provisions related to “Preexisting accounts” and how FATCA, FBAR and 8938 are related, to be covered in the next blog.
Please note the source of content is IRS and Treasury Department website and views are personal and the US and India has not yet entered into a FATCA agreement.
15 Responses
pl mail me update about fatca implication for the NRI persons who are not working in U S , not u s citizen but have USD income
FATCA will apply to any US persons, which includes US Citizens, US Green Card Holders, US Residents (on H1 Visa); i.e. anyone filing 1040. If you file 1040NR, it may not apply to you. Please provide more detail about your situation and I will be guide you accordingly. Thanks.
Hi,
I am on H1B visa for the past 2 years in US. My bank account in India is asking are you a US Person i.e. “Resident”? I am not sure what answer I have to give this, whether yes or no. If “yes”, it means will US tax all my investments in India? I have a housing loan, rental income, Securities, Mutual Funds and bonds. All of those have been bought with my Indian salary when I was in India. Now, I send some money from US to India for repaying loan and other investments like Mutual Funds.
I am already paying the taxes in US. So, really don’t understand what I have to give as a response and what will be the implication if yes or no. Your inputs will be appreciated.
As you have moved to USA for employment and have been living in USA as well as filing 1040 (not 1040NR), you would be a “US Resident” and a Non-Resident Indian (NRI) for both Income tax and FEMA. As a US resident, you are supposed to show your worldwide income in USA i.e. your Indian rent, interest, capital gain MF and any other income and pay tax as per US laws. You would also be required to file the FBAR form to Dept of treasury and other compliance as if you are a “US Resident”. Thanks.
Hi,
I have the following queries on this:
1. When Rv’s account was first opened assuming he had given all address proof, Indian passport details etc. So without updating that information if US Indicia check is done on his account it will come as Non US citizen? Will the bank ask for updated information while doing the seven Indicia rule check as mandated by IRS? If it does, only them would Rv be a US resident, right?
2. If Rv’s house etc. was bought from his Indian salary in earlier FYs and he is getting rental income from that why would that come under the purview of FATCA? Isn’t FATCA only supposed to be about FDAP US sourced Income. In this case, the rental income, is not US origination income. Kindly clarify.
3. Under Model 1 and Model 2 IGAs FFIs do not need to do any withholding for non compliant accounts. Then how will actual withholding happen for defaulter accounts and when?
4. Is there clarity on deferred withholding? If at point in time the withholding agent does not know if the ultimate beneficiary is a non compliant account and withholds 30% amount but later it is clarified that withholding need not have been done for that account. Will the withheld amount be given to the beneficiary with interest?
Sorry for the long list. Am confused as to how the actual FATCA rule will pan out.
Thanks a lot.
1. Yes. They will ask for updated KYC/information eventually. As per FEMA, once you become NRI, you need to inform your bank of your change in status with updated details and your bank would re-designate your resident account as NRO.
2. FATCA is only reporting of financial account. Whether income or not or whether taxable or not is not important. For US resident, their worldwide income is taxable and have to report the income to IRS in 1040 and pay tax. If tax paid in foreign country, they may get the foreign tax deduction.
3. This is just a start. Actual withholding will start in later years.
4. Withholding is not refundable. So you would have to make sure that you do not transfer funds from compliant FFI to non-compliant FFI. Thanks.
Hi sir I am madhav and I did mba in finance from an ordinary college but nw I am looking for cfa could you please tell me is there any scope of us cfa in india .
There is a great scope but it may take time. Also, the most important consideration is what you want to do in future and why you think US CFA can help. Thanks.
I am US citizen. I opened an NRE account in india in 2009. in 2012 i deposited over 50.000 us dollars in my account earning some interest on my fixed deposit. so far i have not filed any fbar or 8938 forms. i am concerned the IRS will get all my information from indian govt thru IGA between US and India. i had no idea about this law all this time. i am planning to close my account in march 2015. my questions are,
1] what should be my course of action going forward for this tax year 2015. should i file FBAR and 8938 forms.
2] if i close my account next month in march. will it still be reported to the IRS.
3] if i file for both FBAR and 8938 how do i prove them as to how much i have in my NRE account and how much interest i made.
4] as per my understanding i have to pay tax on the interest.
5] what about previous years of not reporting anything. what are the implications.
please advice as to the best course of action. i really appreciate your advice
I would suggest you to consider either Streamlined Compliance or Overseas Voluntary disclosure and disclose all your assets/income. Please consult an experience CPA in USA for the same. Thanks.
Hi Jigar,
I had a query regarding extent of compliance on institutions towards disclosure under FATCA. My company, an infrastructure company, is working on a business solution where investments would be solicited form NRIs, NRE and NRO accounts. I have been reading up that FATCA would impact financial as well as non-financial institutions. So, given the context, would it be required for my firm to enter into some kind of agreement with US treasury for filings on investment information or would the bank where the accounts are held would fulfill this mandate?
Thanks
Only Financial accounts attract FATCA requirement. As you would be issuing equity or raising debt directly, you may not be affected by FATCA. However, RBI rules, conditions, procedures and reporting requirements would apply to your raising funds from NRIs. Thanks.
Thank you for the prompt and succinct response.
Hi jigar,
by now i think i have read all your blogs and even the comments . Kudos to your research and this initiative.
Can you clarify, provide some reference articles about US sourced and foreign sourced incomes w.r.t FATCA. a person may be a NRI since last 3 years , however lets say he invested in MFs with his indian savings back in 2008 ! . if such a person wants to redeem his investment now , which is exempt from tax in india, why does he have to pay 30% tax to IRS . IRS accounts for income but isn’t it necessary to find out income source ? It would be fair if the person remitted $ to india , bought MFs in india and is enjoying income w/o reporting the same to IRS, US is losing out $ and revenue.
another example, a person deputed to US or who quit and joined a new employer in US , might still have salary, ppf, gratuity incomes showing up in india. lets say after 5 yrs of employment in india a person received 5 Lakhs as gratuity during the year he moved to US and became an NRI. why should IRS be taxing this 5Lakh .
a person owning a house/flat estate in india years before he became an NRI , through his indian income and renting this out now, he is well below indian tax slabs and so rental income is not taxable . then why should IRS tax 30% of this income ?
to me it seems common sense but the general terms floating around FATCA, fbar etc are not clarifying this point. your inputs and research on this would help.
As per Indian tax laws, long term capital gain on equity investments is exempt from tax provided STT (Securities Transaction Tax) is paid. As per US laws, mutual fund investment is considered as investment in Passive Foreign Investment Company (PFIC) and is taxed accordingly.
Similarly, the laws of both countries are different and as you are a US resident and having investments in India, you need to comply with both USA and Indian tax laws. I suggest you consult with your CPA. Thanks.