FATCA: Full Form, Meaning, Declaration, Rules, Compliance

Individuals living in the USA must have filed a FATCA form at some point. FATCA-related self-declaration is compulsory even for Indian citizens. This mandatory self-declaration to the U.S. federal tax authority has far-reaching implications for financial compliance in almost every country. Let’s learn more about it. 

Key Takeaways

• FATCA means the Foreign Account Tax Compliance Act 
• FATCA’s goal is to prevent non-reporting or under-reporting of foreign assets by U.S. taxpayers
• India signed an Inter-Governmental Agreement (IGA) with the U.S. in 2015. It is compulsory for Indian Financial Institutions to comply with FATCA rules. 
• It is mandatory for Indian citizens to self-declare their US tax connection to their respective banks and financial institutions 

What is FATCA (Foreign Account Tax Compliance Act)?

The Foreign Account Tax Compliance Act (FATCA) is a piece of the US legislation. It makes self-disclosure mandatory for banks and financial institutions with commercial/business relationships with any U.S. taxpayers, whether or not citizens. The U.S. Congress passed the bill in 2010 as part of the HIRE Act in the context of the post-2008 recession. It is Title V of the HIRE Act. 

The HIRE Act promoted incentives to businesses for hiring unemployed workers. And the FATCA was a part of legislation that took care of countering tax evasion to ensure more tax revenue to the public exchequer.  

FACTA mandates that foreign financial institutions (FFIs) obtain self-disclosure from their account holders and report information about U.S. taxpayers. It ensures U.S. taxpayers correctly disclose their foreign assets. 

Purpose and Objectives of FATCA

The principal purpose of FATCA is to detect and counter tax evasion and money laundering. The key objects behind the legislation are:

• Automate data exchange between the federal tax agency and foreign financial institutions
• Ensure reporting of foreign assets of the U.S. taxpayers 
• Building a transparent global financial system 

FATCA Compliance Requirements

FATCA Compliance is broadly categorised into two segments,

1. For foreign financial institutions 
2. For individual U.S. taxpayers 

FFIs are required to:

• Obtain a GIIN (Global Intermediary Identification Number). 
• Perform due diligence 
• Report account details of U.S. taxpayers to the Internal Revenue Service (IRS) 

Individual U.S. taxpayers are expected to report their foreign assets (if any), filing Form 8938 along with their annual tax return. Any mismatch of disclosure between FFIs and individual taxpayers can be a potential signal of tax evasion. 

FATCA Declaration and Forms

Compliance with FATCA disclosure norms requires filing the following forms:

1. Form W-9 - This is for certification of TIN (Taxpayer Identification Number) by U.S. citizens and U.S. resident taxpayers. 
2. Form W-8BEN - U.S. charges 30% withholding tax on U.S.-based incomes, e.g., interests, dividends and other income from U.S.-sourced assets. Non-US residents willing to claim withholding tax at reduced rates are required to file this form to certify that they are not U.S. taxpayers.  
3. Form 8938 - It is the statutory "Statement of Specified Foreign Financial Assets". Every US taxpayer, citizen or resident, must file this form with their annual tax returns to the IRS. 

What is the FATCA Declaration in India?

FATCA Declaration is the mandatory self-declaration form that every bank and financial institution in India requires applicants to fill out and sign while they open accounts or make investments in Indian assets. The purpose is to identify if an accountholder or investor is a U.S.-based person or U.S. taxpayer. 

For the majority of Indians, it involves putting their signatures on the declaration form stating they are not U.S. taxpayers. 

For Indians with U.S. connections (having an address or place of birth in the U.S.), it is mandatory to disclose their TIN in the FATCA declaration. Financial institutions then report their financial statements to the US IRS. 

FATCA Compliance in India

FATCA Compliance in India is mandatory for financial institutions and individual taxpayers as India is a signatory to the Inter-Governmental Agreement (IGA) Model 1 with the U.S. since 2015. 

As per this agreement, it is not necessary for Indian financial institutions to report directly to the IRS. Instead, they report to the Central Board of Direct Taxes (CBDT) in India. CBDT then shares the information with the IRS.  

Who is Required to File FATCA?

FATCA declaration in India clearly distinguishes between self-declaration and reporting to the tax authority. Not everyone is required to report to the U.S. tax authority. 

• Self-declaration - it is mandatory for every account holder and investor in India. 
• Filing Form 8938 - mandatory for U.S. citizens, U.S. residents and NRI US taxpayers holding more than $50,000 in Indian assets. 

Penalties for FATCA Non-Compliance

• Indian citizens refusing to self-declare, Indian financial institutions are required to freeze or close their accounts or refuse to open their accounts. Along with this, FIs can also report such accounts as "recalcitrant", which means difficult to control in a literal sense. 
• U.S. taxpayers failing to report or file Form 8938 are liable to a penalty of $10,000. The penalty may go up to $50,000 for repeated non-disclosure. Additionally, a 40% penalty can be charged for understating the tax liability from undisclosed foreign assets.  

FATCA vs CRS (Common Reporting Standard)

CRS or Common Reporting Standard is a globally recognised standard for automatic transfer and exchange of financial information between sovereign tax authorities. There are over 100 participating countries in the CRS.