Impact of FATCA on NRIs living in the US
The recently enacted FATCA makes it mandatory for Indian tax authorities to share information about earnings of NRIs in US. However both India and US have a treaty signed to avoid double taxation. NRIs living in US can certainly benefit from this treaty
The US government has recently enacted Foreign Account Tax Compliance Act (FATCA), which is primarily intended to detect and thus discourage tax evasion by persons living and earning in United States. However, it is expected to have an impact that extends far beyond tax obligations as it requires an attitudinal change in so far as tax compliance is concerned. And for people of Indian origin living in the US it calls for proper accounting of their earnings on their investments in India, if not done so far, to ensure that they comply with the tax regulations in their host country.
How does India come into the picture?
As per the communication issued to all commercial banks on 27 June, 2014, the Reserve Bank of India (RBI) has advised that governments of India and US have reached an agreement in substance on the terms of an Inter-Government Agreement (IGA) to implement FATCA and that India is now treated as having an IGA in effect from 11 April 2014. The IGA, however, would be signed only after the approval of cabinet. RBI has, therefore, inter-alia advised banks and financial institutions to register with US authorities and obtain a Global Intermediary Identification Number (GIIN) by 31 December 2014 to enable them to comply with the requirements under FATCA.
Similar instructions have been issued by market regulator Securities and Exchange Board of India (SEBI) also on 30 June, 2014 to the capital market intermediaries, including stock exchanges, stock brokers, mutual funds, depositories, depository participants and portfolio managers. In effect, it applies to all financial intermediaries who handle investments in India by non-resident Indians (NRIs) living in the US.
As per the Model 1 of IGA agreed to be signed by the Indian government, Indian financial entities, which in FATCA terminology are called as ‘Foreign Financial Institutions’ (FFI) will be required to report information on US account holders to India’s Central Board of Direct Taxes (CBDT), which would then collate and share the information with the Internal Revenue Service (IRS) of US. The US has so far signed IGAs with over two dozen countries including the UK and Switzerland.
Under the agreement, FATCA requires all foreign financial institutions (FFI) to report information about financial accounts held by US taxpayers and or foreign entities in which US taxpayers hold a substantial ownership interest. In short, FATCA will require FFIs to enter into an agreement with the US Internal Revenue Service (IRS) whereby they agree to:
• identify their US account holders;
• report certain information of such account holders annually to the IRS; and
• withhold tax on payments to recalcitrant US taxpayers and to non-participating FFIs and close accounts belonging to recalcitrant account holders.
If FFIs do not comply, they will suffer a 30% withholding tax on payments of US source income or capital into their institution, irrespective of whether payments are made to the institution itself or on behalf of its clients.
How to identify US persons under the FATCA?
An individual account holder is treated as having US indicia or indicators if the account includes any of the following:
• US Citizenship
• Lawful permanent resident (green card) status
• A US birthplace.
• A US residence address or a US correspondence address including a US PO box.
• Standing instructions to transfer funds to an account maintained in the US or directions regularly received from a US 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 US address.
Having one of these indicators does not mean that the account is owned by a US person, only that it must be given closer scrutiny for identifying their US account holders for reporting as required under the act.
How does this impact NRIs living and earning in US?
Like any other US citizen, non-resident Indians or NRIs too living in US and having investments and assets in India are required to declare details of their earnings in India and pay tax thereon to the US government according to the laws of that country. Even if the income is earned in India and is exempt from income tax in India as per the Indian tax laws, it may not be tax free in US and it may be subject to local taxes. Under the new enactment, the IRS of US will get these details directly from the Indian government, so much so, it is advisable for all tax payers to collate this information meticulously and submit it to the US tax authorities to pre-empt any inquiries from them. But it is best to consult your local tax advisor in this regard and be guided accordingly.
However, there is an agreement called “India US double taxation avoidance treaty” entered into between India and US in 1990 for the avoidance of double taxation for residents of both the countries and NRIs can certainly benefit from this treaty as well.
To learn more about how FATCA might impact you and the benefits available under the India US double taxation avoidance treaty, it is advisable to visit the website of IRS of US Government and also consult your tax advisor for more information.
(The writer is a financial analyst and writes for Moneylife under the pen-name ‘Gurpur’)
