Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA) is a U.S. federal law enacted in 2010 to combat tax evasion by U.S. taxpayers who hold financial assets outside the United States.
It requires foreign financial institutions (FFIs)—such as banks, mutual funds, insurance companies, and investment entities—to identify and report information about financial accounts held by:

• U.S. citizens,

• U.S. residents,

• U.S. green card holders, or

• Foreign entities in which U.S. persons have a substantial ownership interest (usually 10% or more).

This information is reported either directly to the Internal Revenue Service (IRS) or through the country’s local tax authority under an intergovernmental agreement (IGA).

Key Objectives of FATCA

1. Prevent Tax Evasion

FATCA helps the IRS track income and assets that U.S. taxpayers may try to hide in foreign accounts.

2. Improve Transparency

It promotes global cooperation by pushing financial institutions around the world to disclose information about U.S.-linked accounts.

3. Strengthen Compliance

FFIs that fail to comply face a 30% withholding tax on certain U.S.-sourced payments, motivating global institutions to participate.

Who Must Comply with FATCA?

1. Foreign Financial Institutions (FFIs)

These include:

• Banks

• Brokerage firms

• Mutual funds and investment funds

• Certain insurance companies

• Trusts and custodians

These institutions must:

• Conduct due diligence to identify U.S. persons

• Report account details (balances, interest, dividends, withdrawals)

• Renew documentation periodically

2. U.S. Taxpayers with Foreign Assets

U.S. individuals must report their foreign assets if they exceed certain thresholds by filing Form 8938 with their annual tax return.

What Information Is Reported?

Under FATCA, institutions must share:

• Account holder’s name

• Address and tax identification number

• Account number

• Account balance or value

• Income generated from the account

FATCA in India

India has signed an Intergovernmental Agreement (IGA) with the U.S.

• Indian financial institutions report FATCA data to the Central Board of Direct Taxes (CBDT).

• The CBDT then forwards the information to the IRS.

When opening bank accounts or investing, individuals are required to declare their FATCA/CRS self-certification.

Example

A U.S. citizen living in India holds an account in an Indian bank. The bank must classify the person as a U.S. tax resident, collect their U.S. TIN, and report annual account details to the Indian tax authority, which then sends the data to the IRS under FATCA rules.

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