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What is FATCA and Should You Care That It’s Not Really A Weight Loss Program?


The US has new act: the Foreign Account Tax Compliance Act (FATCA) which will allow it to strong-arm foreign financial organizations (like mutual funds or banks) to report to them all of the financial dealings of US taxable entities outside the US.
The US taxes all its citizens on worldwide income even if they are non-resident. Meaning, if you are a US citizen living in India, you have to report all income to the US and pay US taxes on such income. Some Indian tax benefits – like no long term capital gains tax for shares for example – will not apply in the US, so while you don’t pay tax in India, you will have to pay tax on this in the US.
Even US based Non Resident Indians (NRIs) that invest in Indian stocks or real estate need to declare their investments in the US. But it’s been difficult for the US to even know that such investments exist.
Not any more. With the FATCA and a treaty with India, the US has ensured that any Indian financial institution that holds assets or does transactions on behalf of a US Taxable entity, they will have to report this to the US. If they don’t, the financial institution will face a 30% withholding tax on any money paid to it from the US – which is a heavy cost for a financial institution. (Imagine a bank getting 30% less in a money transfer from the US!)
But now, the reporting regulations are heavy, so all banks, brokers and mutual funds (and other entities) will want to know where:

  • you are a taxable US person or entity
  • and if so, what are your account balances, how much you made when any assets were sold, the interest received etc.

Basically, the US Tax authorities want to track activities of their taxable entities anywhere else in the world.

Who is a US Person?

For the readers of this site, here’s a simple definition:

  • You hold an American passport, you’re a US person. Even if you’ve lived in India for forty years.
  • You have a green card. (Even if you live in India or whatever)
  • You are a non-resident Indian with a US Resident status (meaning you either live there or qualify as living there based on the number of days you’ve lived there in the last few years)
  • You have given your address as a US address or gave a US telephone number to the bank/mutual fund/brokerage (but if you’ve done this and are no longer a US taxable entity, you have to give a declaration)
  • You’ve given a power of attorney to a US person
  • A company that’s “controlled” by US persons (one or more)

Essentially, if you are one of the above, then your accounts will be marked and data sent back to US Tax authorities.
There are exceptions – if you own less than $50,000 (whihc is about 30 lakh) worth assets (in total), you’re not someone they care about.

What if you’re Indian and hold assets in the US?

If you hold assets in the US the US will already know. So the FATCA won’t apply to you, as long as you are non-resident.
However, under the FATCA agreement with India, the US brokerages or places will report back to the India about your holdings. So if our tax department is smart enough, they will ding you for any non-compliance. (The new black money bill means you have to declare all such assets in India)

For Mutual Funds, You Can Do It Online

Mutual funds have to comply, so you have to declare that you are NOT a US person. You can do this online – and Jago Investor has an awesome post about how you do this.
If you have an account with any of the Mutual funds in India (except perhaps Sundaram AMC) you can update your FATCA status online – typically if you’re not a US person you just say so and forget about much of the rest.

View: Affects People Who’ve Had US Links

People with assets in India are already doing stunts to try and avoid this FATCA piece, by transferring money back to the US as “gifts” and “Study fees”! Read our article: Indians begin to Maintain Relatives Abroad, Likely US Tax avoidance.
This law also affects Indian startups if their VCs are US entities, if they are deemed to be “controlled” by such investors. It will also affect companies whose management and promoter shareholders are US persons.
(I would not be surprised to see a movie called FATCA ka Jhatka soon.)
FATCA isn’t going to be making people lose weight anytime soon; but it might just make them lose their sleep. I’m quite happy to stay off the US tax radar forever, and find it hilarious that the once coveted “green card” is now a weapon of personal destruction (if you live in India). But still, the fact that you have to actively declare that you aren’t a US entity is incredible – that the US has managed to force that on us.


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