By Brian Mahany,
The United States government announced that it has agreed in principle to terms with India for enforcement of an American law aimed at combatting tax evasion. The Foreign Account Tax Compliance Act – FATCA – was passed by the U.S. Congress in 2010. That law requires financial institutions outside the United States to review their accounts and report any account with ties to a U.S. taxpayer.
The United States is only one of two nations that require worldwide reporting of income, although many governments believe that offshore accounts are used to hide income from taxing authorities.
The United States has little in the way of currency controls; however, every U.S. taxpayer is required to report accounts outside the United States if the total value of all such accounts exceeds $10,000 (US dollars). The American reporting laws apply to Indian nationals who hold a US green card (residency status), Indians working in the United States, Indians with US source income and American citizens retired and living in India.
The U.S. reporting requirements were passed by the American Congress in the early 1970’s but not widely enforced until recent years. Congress also made violation of those laws subject to extremely high civil penalties and for willful violations, punishable by prison.
The United States government believes that compliance with the offshore reporting laws is quite low. FATCA was passed by Congress to increase compliance. Under FATCA, banks, investment companies and even some insurance companies will have to begin reviewing their accounts and searching for owners or signatories with ties to the United States. Under the terms of the agreement reached earlier this month, Indian financial institutions will disclose the information to Indian authorities that will then turn it over to the United States Internal Revenue Service.
Many other countries including India are considering similar financial account reporting requirements. The global effort is being lead by the G20 group of nations.
Now that the two governments have reached an agreement, the Reserve Bank of India and the Securities and Exchange Board of India are expected to announce regulations for Indian financial institutions.
Worldwide, many banks and privacy advocates complained about FATCA, although all of the developed nations are considering a similar global effort. The United States has no authority to regulate Indian banks but failure to comply with FATCA would have subjected them to a 30% withholding tax on U.S. source payments and would have made it difficult for most banks to compete in world commerce.
Indians that live, work or file tax returns in the United States should insure that any accounts in India or outside the United States are properly reported. Reporting by Indian banks will not begin until next year.
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Brian Mahany is a U.S. tax attorney and author of Due Diligence. He is based in Milwaukee, Wisconsin, United States.