FATCA – Foreign Account Tax Compliance Act

A major objective of FATCA is to identify and prevent offshore tax avoidance by US citizens or residents. Its main objective is to combat tax evasion. Essentially, it aims to track US citizens who earn money overseas and stash assets overseas.

In the event that US persons refuse to provide the required documentation, financial institutions may withhold tax. As a result, all financial institutions registered under this act must notify the US tax department when they see US citizens evading taxes. Consequently, all FATCA-registered banks report such account holders (with the available information) immediately. This act has a direct and profound impact on US multinationals as well as Foreign Financial Institutions.

FATCA ensures tax compliance at a global level. It gives foreign financial institutions an opportunity to become more transparent with their tax reporting process and make it easier to comply with laws. Dominant countries such as India have signed the Inter-Governmental Agreement (IGA) with the United States of America in order to comply with FATCA, which ensures that Indian tax officials are able to collect certain account information from US investors. The IGA gives a legal basis for the reporting financial institutions to maintain and report personal and income details, ensuring that US citizens are transparent about taxes while their IT department is able to receive the right data.