> The Foreign Account Tax Compliance Act (FATCA) forms section 501(a) of the broader Hiring Incentives to Restore Employment Act, one of several pieces of legislation designed to boost the economic output of the U.S. following the global financial crisis.

> FATCA was signed into U.S. law in March 2010, and comes into effect in January 2013.

> FATCA’s stated purpose is to increase tax receipts to the U.S. Internal Revenue Service (IRS) by identifying offshore U.S. accounts that could potentially be used for tax evasion purposes.

> FATCA is essentially about closing the tax gap and reducing U.S. uncollected annual tax revenue, which the IRS estimates at approximately $350 billion.

> Despite the fact that it is a U.S. legislation, FATCA has transnational scope and therefore has implications for all financial institutions operating outside of the U.S. — termed Foreign Financial Institutions (FFIs) in the legislation.

> In addition to increasing the obligations for individual U.S. taxpayers to report their offshore accounts, FATCA places an obligation on all FFIs to report information on customers that are known to be, or might be, liable for U.S. tax treatments.

> Since FATCA is U.S. law, FFIs can choose not to report on their customers, in which case, according to the legislation, the institution will be considered as a non-participating FFI (NPFFI).

> However, before institutions opt for an NPFFI status, they should carefully consider the short and long-term impact of this decision:

• a 30 % withholding tax on all U.S. sourced fixed, determinable, annual or periodical (FDAP) income,

• potential negative impact to existing customers and attrition of high net worth customers,

• reputational damage and loss of a competitive edge in global markets.

> Compliance with FATCA demands a multidisciplinary approach involving compliance, IT, and operations functions and has a significant impact on the strategy and approach these teams take.


> If an Indian bank invests or does business dealings with entities in the U.S then it must enter into an FFI Agreement by June 30, 2013, under FATCA with the U.S Treasury or suffer a penalty.

> Even if an Indian Bank does not invest directly in the U.S but invests in an investment vehicle of an institution in Europe/U.K. which further invests in U.S. then also the Indian bank would come under the influence of FATCA. In this scenario, both the Europe/UK firm and the Indian bank might suffer a 30 % penalty of withholding tax if they are not FATCA compliant.

> Banks to retain records of the data gathering process — this includes copies of relevant documentation, evidence of examination, and the name of the employee conducting the checks. “The Banks must ensure that all of the written requests and responses related to the search are retained by the Banks for 10 years.”

> Under the terms of FATCA, Banks will need to classify all account holders into 3 groups:

• U.S. accounts — those held by U.S. taxpayers or those that may be liable for U.S. tax treatments

• Non-U.S. accounts — those with no U.S. tax liabilities

• Recalcitrant accounts — those that have been uncooperative or have failed to provide necessary documentation to the institution

> Based on these classifications all participating Banks will be required to:

• Provide the IRS with information regarding financial accounts held by:

1. U.S. taxpayers

2. Foreign entities owned by U.S. taxpayers

3. Foreign entities in which U.S. taxpayers have a substantial stake

•  Undertake identification and due diligence procedures with respect to new and existing account holders

• Report annually to the IRS on:

1. Account holders who are U.S. legal persons

2. Account holders that are foreign entities with substantial U.S. ownership

3. Account holders with recalcitrant accounts

What banks need to do

> Banks should establish an effective and efficient FATCA program, allowing them to not only ensure compliance, but also minimize business and customer impact.

>  Key features required

•  Dynamic Data Capture

It needs to collect, store, and manage customer information across multiple data sources. Dynamic, interactive customer question & answer, and direct integration with existing systems should be in place to capture essential client information in FATCA specific data fields.

• Complete Customer Profile

It should capture and store relevant customer information, and any changes to that information, as part of its customer profile – providing a single, centralized understanding of the customer.

•  Automated FATCA Identification Tool

It should have automated tools that provides out-of-the box analytics and identification tool to automate FATCA checks such as indicia-based U.S. account identification, customer identity discrepancies, changes in customer profile, and periodic review. Such tools will help bank to manage FATCA operational teams and workloads

 •  Changes in KYC norms

India’s current “Know your customer” (KYC) norms and application process may not be sufficient to identify US citizens and residents.

 The implementation of FATCA will bring significant changes to the

1. current account opening processes,

2. transaction processing systems and

3. the KYC procedures

followed by Indian Banks. Once a bank has identified the accounts, it needs to determine an ongoing reporting, testing, and monitoring process to sustain compliance with FATCA.

•  Integrated Document Management

It should have proper system that has the ability to capture, manage, and store

1. IRS forms,

2. customer identity documentations,

3. other necessary evidential documents, and

4. support FATCA’s 10-year data retention requirements.

Also documentary tracking, email integration, and policies should ensure that the correct documents are captured and kept up-to-date.

•  Comprehensive Audit and Reporting

It should have built-in functionality for automated IRS reporting, graphical operational dashboards which allow tracking of FATCA related investigations and full audit trails that can capture information for regulators, examiners, and internal auditors.

•  Robust Investigation Tools

There should be an investigation tools that make compliance workload more manageable, efficient, and cost effective. It should have built-in capabilities to support major compliance process steps – data collection, customer identification & verification, regulatory filing, document management, and reporting.

•  Structured Workflows

There should be a structured workflow for capturing account authorization and disclosures from relationship managers, streamline documentation requests & responses, mandate specific tasks and manage escalations.


By CA.Pradeep G. Bajoria

M.No.: 126242

[email protected]

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January 2022