Impact of US FATCA on Indian Citizens and Businesses

More articles

Mayur Joshi
Mayur Joshi
CA Mayur Joshi is award winning fraud examiner and foremost forensic accountant. He is regularly quoted in various news papers and is author of atleast 7 books on Forensic Accounting, Money Laundering and Compliance.

What is FATCA?

The Foreign Accounts Tax Compliance Act is a law that compels Americans to report bank accounts held outside of the United States to the Internal Revenue Service (IRS). In the year 2010, the legislation was also made public. The legislation intends to prohibit US taxpayers from evading US-based taxation. Which is on income earned by real or legal persons and to create a transparent and traceable tax system.

FATCA is a tax law that tries to determine the bank accounts of taxpayers who live in the United States. But do not have an address in the United States. FATCA affects between 5.7 and 9 million American residents residing abroad. FATCA, on the other hand, applies to family members or business partners. Those who have signatures on accounts are shared with persons from the United States. It is not a citizen of the United States of America who is present.

Relevance of the Foreign Accounts Tax Compliance Act in India

In the case of cash value insurance and annuity contracts, the insurance company or holding company issues or is also compelled to make payments.

Any entity that is also concerned with owning all or part of the outstanding shares of one or more members of its enlarged connected group. Whether directly or indirectly. The holding firm must either be a member of an enlarged connected group or be an FF1 itself. A depository institution, a custodial institution, an insurance firm, or an investment corporation are all examples of financial institutions. It is also categorized as such because it is a professionally managed organization. That principally engages in financial asset investing, reinvesting, or trading. Because it works or presents itself as an investment vehicle.  With a financial asset investment plan that includes investing, reinvesting, or trading. Alternatively, an investment vehicle founded with an investment strategy of investing, reinvesting, or trading in financial assets may be produced in conjunction with or made available by an investment vehicle.

Funds such as mutual funds, hedge funds, private equity, and venture capital funds with varied investment strategies related to financial assets are all classified as FFIs. It is because of the broad scope of the concept. Trusts handled by professional trust firms or investment managers would also fall under this category.

Non-Financial Foreign Entities (NFFEs) are trusts that are not professionally managed (“NFFE”). Due to the broad breadth of this term, all structures that make investments in India from the United States, such as investment funds, professional fund management companies, banks, wealth planning trust/foundation structures, and so on, would normally be considered FFIs.

A foreign entity that isn’t an FF1 is also referred to as an NFFE-. FATCA is also aimed at NFFEs. This is in order to guarantee that assets are also held overseas by US citizens indirectly through an interest/shareholding in foreign corporations. And those are not hidden from the IRS. As a result, NFFEs encompass any foreign firms that aren’t FFIs yet have at least 10% US ownership under FATCA. NFFEs would comprise a variety of family-owned investment vehicles. Such as partnerships, in addition to the corporations and trusts listed above.

An India-specific brief on issues

FATCA is the US domestic anti-avoidance statute. It has not gotten the attention it deserves from the Indian financial industry. Even though it has been mentioned on occasion.

However, a person wishing to do business with a US-based organization, either directly or indirectly, must have a complete understanding of FATCA. As previously stated, all FFIs are also required to comply with FATCA responsibilities regardless of determinable US interests.

NRI’s investment in India

Non-Resident Indians (“NRIs”) domiciled in the United States who have interests or assets in India should be aware of payments made outside of the United States for such investments. Several high-net-worth NRIs have built their fortunes in India through a variety of investments. Due to the revenue being derived in the United States, all payments would be subject to the high withholding tax. Unless banking institutions, funds, or trusts utilized for such purposes are compliant. Furthermore, Indian banks are attempting to alienate the American people.

This is in order to prevent the participation of funds originating in the United States. As a result, NRIs would have trouble maintaining their Indian bank accounts through which funds are also channelled. Moreover, some NRIs have Hindu Undivided Families (HUF) as their ancestors. If an NRI takes over as Karta of a HUF as a result of succession, the HUF may be categorized as an FFI based on its investments. In this case, Karta’s revenue from HUF might be liable to the 30% withholding tax.

Tax Treaty — FATCA -a dichotomy

Due to the various withholding rates and credit procedures available with respect to FDAP income in the tax treaty, FATCA would also impact India in terms of the India-US DTAA. In general, FATCA does not provide any credit or reimbursement to non-participating FFIs. The treaty mandates lower withholding rates and creditability. The rules stipulate that in the event of a conflict, the credit will be available only to the amount of the treaty’s decreased withholding rate. If an intermediary entity in the system is also defined as an FFI, the lack of tax credit would constitute a severe roadblock for negotiations between India and the US.

Impact on banks

In terms of industry, the banking industry in India would confront a significant problem in achieving FATCA compliance. As of now, Indian banks have a Know-Your-Customer system in place to protect their customers’ identities. According to experts, all processes linked to the establishment of accounts and transactions as they currently exist would need to be entirely overhauled by Indian banks.

This is in order to assure compliance. To guarantee compliance, banks must also maintain a continuous system of monitoring US source payments and reporting on the same. Aside from that, it is critical that all banks have a mechanism in place to evaluate if many accounts may be regarded as one when computing balance. This would be exceedingly difficult to apply in a situation involving several accounts. Including joint accounts, as demonstrated in the case of numerous Non-Resident Indians. All banks must demonstrate that they have FATCA-compliant processes in place. This appears to be a serious difficulty for many Indian institutions at this time.

Impact on the Investment Funds Industry

FATCA’s compliance cost will fall disproportionately. It will fall on the private equity and venture capital funds industry. The final regulations have expanded the definition of “investment entity”. They include fund managers, investment advisors, and general partners in a limited partnership structure. Any entity that works for the purpose of investment or holds financial assets for another qualifies as an FFI. This is according to the Act’s definition. As a result, all fund managers must conduct preliminary work on their existing client base, client take-on procedures, and FATCA due diligence obligations. Because a large part of US investments in India is also made using offshore funds. These are also managed by Indian or Indian-affiliated fund managers. To evade the withholding tax, these businesses must maintain compliance. Withholding responsibilities on pass-through payments will also impact such funds. Albeit the precise scope of these duties has yet to be defined in the final FATCA regulations.

Other considerations

The concept of a “holding company” is important. Since all private equity and similar investment vehicle arrangements would be subject to FATCA. In addition, while not categorized as an FFI, numerous Indian enterprises with significant US interests may be classified as an NFFE. They must comply with FATCA rules. As a result, US-based NRIs have interests in India. This is through mutual funds or hedge funds.

They should be aware of whether such funds have signed up for this regime. It’s also worth noting that, in order to demonstrate compliance, any Indian FFIs or businesses that qualify as FFIs and have significant Indian interests or investments will need to set up mechanisms to demonstrate that they are participating FFIs. Even though an FFI has no US shareholders, assets, or interests. FATCA has a mandated information compliance mechanism that results in categorization as non-compliant. As a result, contrary to common opinion, alienating US-based stock, investments, or assets would not exclude an FFI from FATCA’s reach.


The US and European players shifting gears to comply with FATCA. Emerging countries like India must get a head start on fulfilling FATCA compliance costs. The goal is to highlight the necessity for FATCA-affected organizations. To first determine if and to what extent they will be affected by FATCA. As well as the duties that will be placed on them as a result. As a result, each firm must assess the rules’ obligations.

Such as improved due diligence processes, tax reporting, tax withholding, and HI agreements. Furthermore, while most firms are concentrating on the aforementioned fundamental criteria. Few are taking measures to meet the issues provided by FATCA in terms of satisfying the IRS’s governance, compliance, and control structure. Because the number of complexities required to execute such controls will be high. It is critical that, in addition to understanding the basic consequences of FATCA, all organizations, particularly multinational corporations and institutions, concentrate on establishing a compliance and control structure.

- Featured Certification-spot_img