The Foreign Account Tax Compliance Act (FATCA)

The Foreign Account Tax Compliance Act (FATCA) makes it compulsory for all financial institutions in the world to report to the US Government comprehensive details of all transactions involving these ‘US persons’. From April this year onwards, under this new US law, it has become extremely onerous for any financial institution around the world to deal with ‘US persons’, which includes US citizens, green card holders and some other types of people and entities.

If a financial company doesn’t collect and report this data to the US government, and it has any assets in the United States, then the US Government will confiscate 30% of those assets as a withholding tax. This also applies to any connected business — what we would call a group company. Of course a confiscation of 30% of assets would utterly destroy any financial business.

The complexity and cost of compliance with FATCA is considerable, and the punishment for making a mistake is huge. Therefore, what FATCA boils down to is that if you have any intention of ever having any financial dealings in the United States, then you need to work as an unpaid tax collector for Uncle Sam, chasing down its citizens around the world. Take it or leave it.

The root cause is that the US is one of the only two countries in the world that has citizenship-based taxation rather than residency-based taxation. FATCA has had a huge impact on the desirability of having Americans as customers by financial businesses around the world and NRIs in India are no exception.

Some mutual funds are preparing to weed out existing NRI investors, and something similar is going on with stock brokerages, banks and even some real estate developers. According to the official database that one can download from the US Internal Revenue Service’s (IRS) website, more than four hundred Indian entities have signed an agreement of compliance with the IRS. However, many, even some of the ones who have signed up, are turning down business from US citizens. It looks likely that many financial businesses will sign the compliance agreements with the IRS, but may still avoid US citizens in order to avoid the cost, complexity and risk of reporting. At best, they’ll limit themselves to dealing with a handful of lucrative accounts. This will be a problem for a huge number of NRIs and ordinary citizens.