All you wanted to know about Foreign Account Tax Compliance Act (FATCA) and its impact on FIIs Inflows

What is FATCA?

FATCA was enacted by the US government in March 2010 to ensure that no US citizen, holding offshore accounts with foreign financial institutions (FFIs), evade tax through foreign accounts.

Final regulation in this regard was published on January 28, 2013 detailing about its due diligence, reporting and withholding obligations.

Some of the salient features of FATCA

• When fully effective, FATCA will require FFIs to sign agreement directly with the U.S. tax authorities to identify its U.S. accountholders and to annually report information about their accounts.
• FFIs will be required to withhold tax on pass-through payments made to accountholders, who have not submitted information requested by an FFIs undertaking account identification procedures and to FFIs that are not compliant with FATCA
• If a local privacy law in any country prevents the FFIs from reporting information about a U.S. accountholder than either the FFIs would be required to request the accountholder to waive the privacy law or need to close that account.
• If any FFIs fails to comply with FATCA, he will be subject to a 30 percent withholding tax on withholdable payments
• In some countries, domestic laws may prevent an FFI from complying with FATCA. Therefore to overcome such legal impediments, the U.S. government will collaborate with other governments to develop model intergovernmental agreements to implement FATCA.
• Process of the registration of such FIIs will start from January 1, 2014 and will end on April 25, 2014. From first of July of next year only FATCA compliant US funds can invest in other countries including India.

Why it is important for India?

The importance of the FIIs inflow not only to the Indian equity market but even for our economy, which is running such high current account deficit, cannot be understated. Therefore any policy domestic or international hampering such flows will definitely hurt our market.  Although it is not clear and even difficult to identify what amount of FIIs inflows in India originates from US investors, it is estimated that 40 per cent of such inflows can get impacted. There is still seven months left before we can feel the heat but market intermediaries have already made their presentation to SEBI, which is expected to submit its feedback to finance ministry before the government negotiate and arrive at an Inter Government Agreement.