Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

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.

  • Billu says:

    “he fact that you have to actively declare that you aren’t a US entity is incredible”
    It is the most incredible thing of this treaty. I wonder if it would hold in court!

  • Sanjeev B says:

    Incredible is an euphemism. It’s debasing. As an Indian citizen and resident, I should not be answerable for anything except my tax obligations to the Indian government. Do I also have to declare that I’ve not been to Antarctica, I don’t own pet monkeys and I’m not a fan of garlic chutney? Tell me, is the US asking each of their citizens and companies whether they are Indian tax entities? Are they taking declarations from each one of them that they are not? If they aren’t, why should we be expected to do so? I will not comply. I’ll pull out my mutual funds if I have to. Having to read “Patriot Act” on the home page of all Indian banks is insulting enough, now they want us to prostrate as individuals. I hope this is challenged in the courts.

    • Gold Bug says:

      No use getting emotional about this matter. US has not singled any one Country. This rule is applied universally.
      It is basically a form of Capital Control and checking Tax evasion.
      As far as India is concerned USA looks at India and it’s elites as corrupt, inefficient, lazy, dirty, crony etc. etc.
      If India had adopted policies like Singapore or China may be the past colonial humiliation would have turned to admiration and respect. But our elites sold this country and have made it neo colonial. Humiliation is natural.
      Please don’t blame others for your actions.

  • Tarun says:

    I think these perceived “insults” are overblown. The US is just enforcing its taxation laws – if some one was avoiding/evading he/she are now in big soup. Such people were having a free ride earlier now they are not. Thats it. We dont need to bring national pride and other such bhashan into the discussion. As somebody once said – patriotism is the last refuge of a scoundrel.

  • Sanjeev B says:

    Tarun, point taken about being being objective. But is this compliance being reciprocated? Is the US asking each of their citizens and companies whether they are Indian tax entities? Are they taking declarations from each one of them that they are not?
    Gold Bug, corruption in China is greater than India. And corruption in the US is redefined to the point where they have laws and actions that are morally questionable, such as the decision to back all the top banks post 2008. The recent histories of Goldman Sachs, J P Morgan, Citibank tell a story where America’s elite have made the rules by themselves and for themselves and everyone else. It’s just that they are much slicker at doing this than the elites of any other country, and of course the fact that they ensure a very high minimum standard of living for that country’s citizens so ordinary folk really don’t care what happens. That is where they have succeeded and we have failed.