Why are Indian citizens and businesses being asked to sign FATCA Declarations?

By Raghu Marwah, R N MARWAH & CO LLP

On 9 July 2015, India entered into an Inter-Governmental Agreement (IGA-1) with the United States of America under which it has been agreed to share data on a reciprocal basis with regard to the financial holdings and interests of U.S. residents in India and Indian nationals in the USA. Similarly, on 3 June 2015, the Indian government signed the OECD’s Multilateral Tax Treaty aimed at establishing a Common Reporting Standard for all partner jurisdictions. But what is FATCA and why does it sound so alarming?

Well, the Foreign Account Tax Compliance Act (FATCA) is a United States federal tax law initially aimed to curb money laundering and with the stated purpose of catching the “fat cat” tax cheats s who hide their money abroad. The Act was ratified in 2010 and came into effect from 2014 onwards. However, does the world’s foremost superpower really believe that its “fat cats” are going to park their wealth in India – a jurisdiction well-known for its obstacles to doing business and high rates of taxation? In this globalised world, money flows across borders quicker than cars can get across New Delhi. Furthermore, with the ever-increasing number of wealthy non-resident Indians (NRI) based in the USA, cross-border financial interests continue to increase and gain traction. The perception of the “fat cat” has also undergone a significant change in the last decade. Nowadays, it would not be too outlandish to expect an Asian to be included a list of the USA’s wealthiest people.

But the question remains as to why India is jumping on the FATCA bandwagon and amending its local laws to suit the Americans. After all, it is not as if India does not already have to cope with the burden of its own compliance legislation and process reams of paper work. International cooperation comes at a cost; given that India wants to catch its own  “fat cats”, preventing them from concealing their fortune and using it to buy fancy hotels and villas across the globe, it needs  American assistance. That is why the Indian government is so enamoured with FATCA.

Financial institutions in India are to publish staggered reports on data from financial accounts such as bank accounts, custodial accounts, deposit accounts and insurance accounts. This data includes interest, dividends, sales, redemptions, surrender values and any other income generated in accounts pertaining to specified U.S. persons or non-U.S entities controlled by one or more persons who qualify as a specified U.S. person. This means that Indian financial institutions now need to identify exactly who among their millions of customers would be regarded as a specified U.S. person and then start reporting data on them to the Indian Competent Authority. In addition, the financial institutions in India will need to ensure proper tax withholding on any U.S. source withholdable payment to any non-participating financial institution.

Accountants in the USA are laughing all the way to the bank now that the U.S. Government has obliged by opening up international tax compliance opportunities from across the globe. But is it really helping the Americans, other than reinforcing their image as the “big bully’ of the world? There have been a few Republican senators and Democrat party papers which have advocated the scrapping of FATCA due to the negative impact of its roll out. However, in the post-9/11 environment, this heady cocktail of national security interests and money laundering restrictions takes precedence.

This enhanced inter-governmental co-operation heralds a sea change. It is now the case that governments will have transparent access not only to the population’s digital, but also financial, footprints. The age of Big Brother looking over your shoulder and watching your every move has truly arrived. Issues surrounding privacy, hacking and data abuse will become an increasingly important theme going forward, especially given that there will be so much more data available on Indian interests at home and abroad.

Team RNM recommends that specified U.S. persons with financial accounts in India seek professional advice with regard to implications for tax compliance in the USA.

Raghu Marwah
R N MARWAH & CO LLP, New Delhi, Bangalore, India
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.; Website: http://www.rnm.in

published: November 2015