{"id":1399,"date":"2023-10-06T12:05:02","date_gmt":"2023-10-06T12:05:02","guid":{"rendered":"https:\/\/trackwizz.com\/knowledge-hub\/?p=1399"},"modified":"2023-10-06T12:11:03","modified_gmt":"2023-10-06T12:11:03","slug":"what-is-fatca-and-how-its-used-in-banks","status":"publish","type":"post","link":"https:\/\/trackwizz.com\/knowledge-hub\/what-is-fatca-and-how-its-used-in-banks\/","title":{"rendered":"What is Fatca and how it\u2019s used in Banks"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">All NRIs must adhere to global tax compliance systems for their offshore accounts. One of the most important sets of rules is outlined within the Foreign Account Tax Compliance Act or <\/span><b>FATCA <\/b><span style=\"font-weight: 400;\">for NRIs living in the USA.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Any NRI living in the USA and investing in Indian assets will have to adhere to the <\/span><b>Foreign Account Tax Compliance Act (FATCA) <\/b><span style=\"font-weight: 400;\">laws. These legislations require financial institutions to declare details of accounts held by US taxpayers. FATCA also requires a self-declaration from NRIs living in the USA while making investments in India.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Following the signing of the <\/span><b>IGA<\/b><span style=\"font-weight: 400;\">, on 7 August 2015, the Indian Government enacted rules relating to FATCA reporting in India. A brief overview of the due diligence requirements and the rules that need to be maintained and reported by financial institutions is:\u00a0<\/span><\/p>\n<ul>\n<li><b>Rule 114F <\/b><span style=\"font-weight: 400;\">\u2013 Definitions of the various terms referred to in the rules;\u00a0<\/span><\/li>\n<li><b>Rule 114G <\/b><span style=\"font-weight: 400;\">\u2013 Information to be maintained and reported; and\u00a0<\/span><\/li>\n<li><b>Rule 114H <\/b><span style=\"font-weight: 400;\">\u2013 Due diligence requirement.\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">These rules have been divided into three specific segments which deal with various aspects of the FATCA reporting regime\u00a0<\/span><\/p>\n<p><b>What is FATCA?\u00a0<\/b><\/p>\n<p><b>FATCA <\/b><span style=\"font-weight: 400;\">is a tax information reporting regime, that requires Financial Institutions (FIs) to identify their U.S. accounts through enhanced due diligence reviews and report them periodically to the U.S. Internal Revenue Service (IRS) or in case of an Inter-Governmental agreement(IGA), to appropriate government authority.\u00a0<\/span><\/p>\n<p><b>FATCA <\/b><span style=\"font-weight: 400;\">as a law thus, requires U.S. citizens living at home or abroad to file annual reports on any foreign account holdings they have.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">With the main goal of stopping tax evasion, <\/span><b>FATCA <\/b><span style=\"font-weight: 400;\">was passed in 2010 as part of the Hiring Incentives to Restore Employment <\/span><b>(HIRE) Act<\/b><span style=\"font-weight: 400;\">, which is designed to promote transparency in the global financial services sector.\u00a0<\/span><\/p>\n<p><b>What is the core objective of FATCA?\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The objective of FATCA is to detect, deter, and discourage offshore tax evasion by U.S. citizens or residents by requesting information about U.S. persons to increase transparency for the U.S.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">FATCA\u2019s provisions are designed with incentives for FFIs and USWAs to provide information to the IRS on financial accounts held by U.S. persons:\u00a0<\/span><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">Directly investing outside the U.S.; or\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Indirectly investing through a non-U.S. entity\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Foreign institutions outside of U.S. jurisdiction will have a strong incentive to comply in order to avoid<\/span><\/p>\n<p><span style=\"font-weight: 400;\">the 30% withholding tax on any withholdable payment received from sources within the U.S. levied on non-compliant individuals and entities.\u00a0<\/span><\/p>\n<p><b>What is CRS?\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Common Reporting Standard (<\/span><b>CRS<\/b><span style=\"font-weight: 400;\">) is a global-level uniform standard for the automatic exchange of financial account information. CRS is an initiative of G-20 countries and the Organisation for Economic Co-operation and Development (<\/span><b>OECD<\/b><span style=\"font-weight: 400;\">) and is similar to <\/span><b>FATCA<\/b><span style=\"font-weight: 400;\">. Under this standard, jurisdictions would obtain financial information from their financial institutions and exchange that information with other jurisdictions on an automatic annual basis.\u00a0<\/span><\/p>\n<p><b>What is an IGA?\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">An Intergovernmental Agreement (<\/span><b>IGA<\/b><span style=\"font-weight: 400;\">) is a bilateral agreement between a country\u2019s government and the U.S. government that facilitates compliance with FATCA. The model agreements enable FFIs in the designated jurisdictions to comply with FATCA, especially where privacy laws exist. There are currently two types of IGAs, <\/span><b>Model I <\/b><span style=\"font-weight: 400;\">and <\/span><b>Model II<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A Model I agreement allows FFIs within the country to report to the local country authority, which will then provide the information to the IRS. Each country\u2019s tax authority has a separate <\/span><b>Model I Agreement <\/b><span style=\"font-weight: 400;\">with the IRS, which includes country-specific provisions in addition to simplified due diligence and withholding requirements. Under a <\/span><b>Model II agreement<\/b><span style=\"font-weight: 400;\">, the FFI would directly report information to the IRS.\u00a0<\/span><\/p>\n<p><b>FATCA India\u00a0<\/b><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">U.S. persons are required to report their global assets to the U.S. government when the threshold requirements for reporting are met. When a person is a citizen of India, but is also a U.S. Citizen, Legal Permanent Resident, or otherwise meets the substantial presence test, they are considered a U.S. person for tax purposes.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">As a U.S. person, the taxpayer must <\/span><i><span style=\"font-weight: 400;\">report their foreign assets, accounts, investments, and income <\/span><\/i><span style=\"font-weight: 400;\">to the <\/span><b>IRS <\/b><span style=\"font-weight: 400;\">and <\/span><b>FinCEN <\/b><span style=\"font-weight: 400;\">on a myriad of different international information reporting forms, such as FBAR and FATCA Form 8938.\u00a0<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">FATCA and other international tax penalties can be reduced or avoided through offshore tax amnesty programs.\u00a0<\/span><\/p>\n<p><b>FATCA Reporting &#8211; India\u00a0<\/b><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">Many years ago, India and the U.S. entered into a FATCA Agreement (<\/span><b>IGA<\/b><span style=\"font-weight: 400;\">) which requires Foreign Financial Institutions (FFI) in India to report U.S. account holder information to the IRS, and vice versa.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Indian Banks such as ICICI, SBI, HDFC, and Axis routinely issue FATCA letters to customers. <\/span><\/li>\n<li><span style=\"font-weight: 400;\">These letters require the asset or account holder to disclose their U.S. citizenship or residence status, which is then forwarded to the U.S. government.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The IRS has taken an aggressive approach to foreign accounts compliance. Non-compliance with offshore accounts and income reporting may result in significant offshore fines and penalties. <\/span><\/li>\n<li><span style=\"font-weight: 400;\">If you are a U.S. person (living in the U.S. or abroad) and have accounts in India, the IRS may require you to report the maximum balances of each account on an annual basis.\u00a0<\/span><\/li>\n<\/ul>\n<p><b>The Significance of FATCA in India <\/b><span style=\"font-weight: 400;\">&#8211;\u00a0<\/span><\/p>\n<ul>\n<li><b> <\/b><b>Combating Tax Evasion\u00a0<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">One of FATCA&#8217;s primary objectives is to combat tax evasion. Historically, Indian residents have used offshore accounts to hide income and assets, depriving the Indian government of tax revenue.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">FATCA&#8217;s reporting requirements help Indian authorities identify such accounts.\u00a0<\/span><\/p>\n<ul>\n<li><b> <\/b><b>Promoting Tax Transparency\u00a0<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">FATCA promotes transparency by facilitating the exchange of financial information between countries. This allows Indian tax authorities to verify that residents with foreign accounts are accurately reporting their income and assets.\u00a0<\/span><\/p>\n<ul>\n<li><b> <\/b><b>Strengthening India&#8217;s Financial Ecosystem\u00a0<\/b><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Compliance with FATCA strengthens India&#8217;s position in the global financial ecosystem. It demonstrates India&#8217;s commitment to international tax regulations and fosters confidence among foreign investors.\u00a0<\/span><\/p>\n<p><b>What is the purpose of FATCA\/CRS?\u00a0<\/b><\/p>\n<ul>\n<li><b>FATCA <\/b><span style=\"font-weight: 400;\">aims to prevent U.S. persons from using banks and other financial institutions outside the U.S. to park their wealth outside the U.S. and consequently avoid U.S. taxation on income generated from such wealth.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">FATCA-CRS obliges financial institutions to report information about U.S. persons having accounts with them.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Similar to FATCA, the purpose of <\/span><b>CRS <\/b><span style=\"font-weight: 400;\">is to aid the automatic exchange of information between bilateral treaty partner countries about account holders\/investors maintaining accounts in foreign jurisdictions so as to avoid tax evasion on the funds parked in such countries.\u00a0<\/span><\/li>\n<\/ul>\n<p><b>Difference between FATCA and CRS\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Buoyed by the success of <\/span><b>FATCA<\/b><span style=\"font-weight: 400;\">, the Organisation of Economic Cooperation and Development (<\/span><b>OECD<\/b><span style=\"font-weight: 400;\">) introduced the CRS or Common Standard on Reporting and Due Diligence for Financial Account Information. The CRS was based on similar regulations as the FATCA, but there are notable differences between the two.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While both legislations were introduced to combat tax evasion, <\/span><b>CRS <\/b><span style=\"font-weight: 400;\">has a more considerable breadth of design. It <\/span><i><span style=\"font-weight: 400;\">covers 90 countries except the US<\/span><\/i><span style=\"font-weight: 400;\">. Reporting of all financial accounts is mandatory under the CRS, while it is not compulsory for FATCA. FATCA concerns only people living in the USA and has a limit that exempts US taxpayers with an aggregate value of foreign financial assets less than $50,000. CRS does not have any such exemptions.<\/span><\/p>\n<p><b>What Are The Implications For Non-Compliance?\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">The implications of non-compliance with the <\/span><b>FATCA <\/b><span style=\"font-weight: 400;\">are severe for both foreign financial institutions and individuals.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For foreign financial institutions, failing to enter into a legally binding agreement with the <\/span><b>IRS <\/b><span style=\"font-weight: 400;\">to disclose information about their U.S. clients may result in a 30% withholding tax rate on all related payments received.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This means that <\/span><i><span style=\"font-weight: 400;\">30% of all deposits, dividends, or interest payments may be withheld from investors<\/span><\/i><span style=\"font-weight: 400;\">. In addition, the foreign financial institution may be subject to penalties for failing to report correctly.\u00a0<\/span><\/p>\n<p><b>What are the compliance requirements of FATCA?\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">To comply with the final <\/span><b>FATCA <\/b><span style=\"font-weight: 400;\">regulations released on January 17, 2013, all financial institutions must identify and classify their account holders and report on all accounts (products and services) directly or indirectly owned by U.S. taxpayers, foreign financial institutions (FFIs) and non-financial foreign entities as required.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">FATCA compliance requires FFIs, including foreign subsidiaries of U.S.-based organizations, take steps to: <\/span><span style=\"font-weight: 400;\">\u25cf <\/span><span style=\"font-weight: 400;\">Enter into an FFI agreement with the IRS that states its intent to comply with <\/span><b>FATCA <\/b><span style=\"font-weight: 400;\">\u25cf <\/span><span style=\"font-weight: 400;\">Conduct due diligence for new and existing accounts to classify account holders or investors as either U.S. or non-U.S.\u00a0<\/span><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">Withhold 30% in U.S. taxes when individuals fail to provide the appropriate documentation or when doing business with non-compliant entities\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Report account information directly to the <\/span><b>IRS <\/b><span style=\"font-weight: 400;\">or indirectly through their national government which have signed Intergovernmental Agreements (<\/span><b>IGA<\/b><span style=\"font-weight: 400;\">)\u00a0<\/span><\/li>\n<\/ul>\n<p><b>To whom does FATCA apply ?\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">According to FATCA, everyone living in the USA is subject to this tax law. These include: <\/span><span style=\"font-weight: 400;\">\u25cf <\/span><span style=\"font-weight: 400;\">US permanent residents or green cardholders\u00a0<\/span><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">US citizens or NRIs who have migrated to the US and are now its naturalized citizens <\/span><span style=\"font-weight: 400;\">\u25cf <\/span><span style=\"font-weight: 400;\">NRIs and Persons of Indian Origin (PIO) working in the US via B1\/B2, H1-B, E-2, or L1\/L2 visa\u00a0<\/span><\/li>\n<\/ul>\n<p><b>US-India agreement &#8211; FATCA implementation\u00a0<\/b><\/p>\n<p><span style=\"font-weight: 400;\">FATCA ensures tax compliance and transformation at a global level. It presents foreign financial institutions with a chance to improve and streamline their tax reporting process. It also gives them visibility in the foreign country and gains the trust of investors.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To accommodate FATCA, the government had inserted Rules 114F to 114H and Form 61B in the <\/span><b>Income Tax Act <\/b><span style=\"font-weight: 400;\">in 2014. The Indian Government also signed the Inter-Governmental Agreement (<\/span><b>IGA<\/b><span style=\"font-weight: 400;\">) with the United States of America in the year 2015 for the implementation of <\/span><b>FATCA<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">According to the agreement, Indian tax officials are required to obtain specific account information from US investors. The goal was to ensure tax compliance by the US citizens while increasing transparency for<\/span><\/p>\n<p><span style=\"font-weight: 400;\">the Internal Revenue Service (<\/span><b>IRS<\/b><span style=\"font-weight: 400;\">). This gave a legal basis for the reporting financial institutions to maintain and report personal and income details.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>All NRIs must adhere to global tax compliance systems for their offshore accounts. One of the most important sets of rules is outlined within the Foreign Account Tax Compliance Act or FATCA for NRIs living in the USA.\u00a0 Any NRI living in the USA and investing in Indian assets will have to adhere to the [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"footnotes":"","_links_to":"","_links_to_target":""},"categories":[3],"tags":[],"class_list":["post-1399","post","type-post","status-publish","format-standard","hentry","category-fatca-crs"],"_links":{"self":[{"href":"https:\/\/trackwizz.com\/knowledge-hub\/wp-json\/wp\/v2\/posts\/1399","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/trackwizz.com\/knowledge-hub\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/trackwizz.com\/knowledge-hub\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/trackwizz.com\/knowledge-hub\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/trackwizz.com\/knowledge-hub\/wp-json\/wp\/v2\/comments?post=1399"}],"version-history":[{"count":2,"href":"https:\/\/trackwizz.com\/knowledge-hub\/wp-json\/wp\/v2\/posts\/1399\/revisions"}],"predecessor-version":[{"id":1401,"href":"https:\/\/trackwizz.com\/knowledge-hub\/wp-json\/wp\/v2\/posts\/1399\/revisions\/1401"}],"wp:attachment":[{"href":"https:\/\/trackwizz.com\/knowledge-hub\/wp-json\/wp\/v2\/media?parent=1399"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/trackwizz.com\/knowledge-hub\/wp-json\/wp\/v2\/categories?post=1399"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/trackwizz.com\/knowledge-hub\/wp-json\/wp\/v2\/tags?post=1399"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}