Foreign Account Tax Compliance Act (FATCA)
Table of Contents
Foreign Account Tax Compliance Act (FATCA)
Overview of the FATCA
The seeds of the financial crisis were sown many years ago, when interest rates were extremely low and lending standards were extremely lax, resulting in the construction of a home price bubble in the United States. The bubble burst, and the years 2007-2009 were defined by a historic financial crisis, with individuals losing their jobs and their investments becoming worthless. With significant unemployment and a looming financial catastrophe, the government sought to stimulate the economy. In 2010, as part of the Hiring Incentives to Restore Employment (HIRE) Act, the Foreign Account Tax Compliance Act (FACTA) was enacted in US taxation.
The HIRE Act was passed to encourage businesses to hire unemployed workers. Increased business tax credit for each new employee hired and retained for a minimum of 52 weeks, payroll tax holiday, and increased expenditure deduction limit on the purchase of new equipment were some of the incentives granted under the HIRE Act.
Any corporation formally classed as a “foreign financial institution” (FFI) must declare to US authorities any financial accounts held for US persons or citizens, as well as any foreign entities in which US individuals or citizens own a substantial share. Failure carries a 30 percent withholding tax on gross US profits as a penalty.
FATCA, which was implemented at the same time, requires U.S. citizens to report any overseas account holdings and assets on an annual basis. It will aid in the elimination of tax evasion by American people and businesses that invest and earn revenue in other countries. By introducing FATCA into the picture, the US government not only attempted to reduce tax evasion, but also raised revenue inflows to support the HIRE Act’s incentive strategy.
FATCA in India
FATCA aims to make the global financial system more transparent. In 2015, the Indian government agreed to implement FATCA as part of an intergovernmental agreement between India and the United States. As a result, it encourages the tracking of income made by NRIs in the United States from their non-US investments and assets.
According to the inter-governmental agreement, tax officials must seek self-declaration from NRI investors about FATCA compliance using Form 61B in accordance with Rules 114F and 114H of the Income Tax Rules 1962.
Non-Compliance of FATCA Norms
Noncompliance with FATCA rules in India can result in bank accounts being frozen, mutual fund investments being suspended, and PPF and NPS accounts being blocked.
To Whom FATCA Act Apply?
Individuals and businesses that are classified as US persons for tax reasons are affected by the FACTA legislation. These include the following:
- United States citizens or NRIs who have migrated to the US and are now its naturalized citizens
- United States Corporations, US Partnerships, US Estates and US Trusts.
- United States permanent residents or green cardholders
- NRIs and Persons of Indian Origin (PIO) working in the US via B1/B2, H1-B, E-2, or L1/L2 visa
Report on which foreign assets?
All the individuals and business entities have to report annually on its Foreign assets which include:-
- Foreign Pensions
- Foreign Stockholdings
- Foreign Partnership Interests
- Foreign Financial accounts
- Foreign Mutual Funds
- Foreign Issued Life Insurance
- Foreign Hedge funds
- Foreign Real Estate held through a Foreign Entity
House properties owned by NRIs in India are not included in FATCA’s list of designated assets. As a result, FATCA does not apply to money derived from them. In India, however, this revenue is subject to taxation.
Antiques, jewellery, vehicles, art pieces, and other collectibles are among the assets that are exempt from FATCA. It is not necessary to report safety deposit boxes. FATCA does not require you to report foreign currency stored in your possession but not with a financial institution.
FBAR vs. FATCA
The Foreign Bank Account Report (FBAR) is similar to FATCA in that it aims to catch tax evaders who hide money in foreign bank accounts. FBAR reporting is unique in that it applies to foreign account balances of $10,000 or more (even if the accounts were only open for a minute!). You must file FinCEN 114 electronically by June 30 each year if it applies. Only bank accounts must be declared on the FBAR; no other assets must be disclosed.
FATCA, on the other hand, is a more comprehensive programme. While bank accounts and other foreign assets must be reported, the thresholds are substantially higher. If your assets surpass the following amounts, you must file FATCA:-
- Single foreign taxpayers: $200,000 on the last day of the tax year or $300,000 at any time during the year
- Married taxpayers living outside the United States: $400,000 on the last day of the tax year and $600,000 at any time during the year.
- Single taxpayers in the United States: $50,000 at the end of the tax year or $75,000 at any time during the year.
- Married taxpayers in the United States: $100,000 at the end of the tax year or $150,000 at any time during the year.
CRS vs. FATCA
The Organization for Economic Cooperation and Development (OECD) created the CRS or Common Standard on Reporting and Due Diligence for Financial Account Information, in response to the success of FATCA. The CRS is founded on rules that are similar to the FATCA, although there are significant variations between the two. While both laws were designed to prevent tax evasion, the CRS has a wider scope of application. Except for the United States, it covers 90 countries. Under the CRS, reporting of all financial accounts is required, but FATCA does not.
FATCA only applies to persons who live in the United States, and it contains a $50,000 threshold that exempts US taxpayers with overseas financial holdings worth less than $50,000. There are no such exclusions in the CRS.
Renouncing to avoid FATCA may be unrealistic for few people
Many Americans are considering giving up their citizenship as more information about FATCA’s intrusive nature becomes accessible. You can avoid FATCA reporting responsibilities by giving up your US citizenship, but it isn’t always that simple.
To begin with, renouncing costs $2350. That’s right, handing over your passport will set you back $2350. Some expats may find this price tag prohibitive, and they will be compelled to continue filing US taxes as citizens.
Second, you may be classified as a “covered expat,” which means you may be subject to an exit tax.
It’s vital to remember that if you plan to relocate to the United States, you’ll need to show that you’ve paid your US expat taxes for the previous five years. So, if you haven’t paid your US taxes in a while, you’ll need to do so before filing for renunciation.
Foreign Institution Compliance
Non-U.S. Foreign Financial Institutions (FFI) and Non-Financial Foreign Entities (NFFE) must comply with US federal law by reporting to the IRS the identity of US persons and the value of their assets kept in their banks. If an FFI or NFFE enters into an agreement with the IRS to report on their account holders, they may be forced to withhold 30% of payments to the foreign payee as a tax penalty if the payee does not comply with FATCA.
Non-Compliance
Failure to complete annual reports detailing foreign accounts and assets can result in severe penalties. The IRS imposes a $10,000 penalty each violation, with an additional penalty of up to $50,000 if the offence is repeated after the IRS has been notified. A penalty of 40% would be imposed on any underestimate of tax due to non-disclosed assets.
No penalty will be imposed if the failure to disclose is deemed reasonable; this will be determined on a case-by-case basis. FATCA is implemented through bilateral intergovernmental agreements (IGAs), which differ from jurisdiction to jurisdiction, making global compliance difficult.
- Some IGAs let FFIs to report locally – but only through that jurisdiction’s specific local mechanism, as FATCA obligations have been incorporated into local legislation in a unique fashion.
- Others allow FFIs to report directly to the US tax authorities, but there is a risk of conflict with local regulations governing data protection.
Form 61B, the yearly FATCA and CRS report, is due by May 31 of the following year. Failure to file Form 61B would result in a fine of Rs 500 each day. A penalty of Rs 50,000 is imposed for providing false information.
FATCA reporting doesn’t have to be complicated
We understand! Financial reporting in a foreign country might be perplexing. The good news is that you don’t have to tackle it alone if you know you need to submit FATCA. We can assist you in completing Form 8938 in order to comply with FATCA reporting obligations and avoid fines for non-compliance.
This is something that many Americans have already experienced. The bank sent them a letter alerting them of the new Foreign Account Tax Compliance Act legislation and its implications for their bank accounts. Unfortunately, as a result of the Act, several financial organizations (particularly banks) have refused to service US people. For them, being compliant and sharing information with the IRS is too expensive.
Still have questions about FATCA?
Are you looking for additional information about FATCA filing requirements? To obtain the answers you need from one of our professional CPAs, leave a comment below or Contact Us immediately. Are you interested in learning more about FATCA? Please do not hesitate to get in touch with us.
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