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FATCA & CRS- an effective tool against tax evasion

FATCA and CRS are the global reporting standards for the automatic exchange of tax information, developed by US and OECD respectively. These standards will not only restrict tax evasion but also restricts black money, hawala transactions, money laundering and terrorist financing.

Foreign Account Tax Compliance Act

FATCA is an US Act that promotes cross border tax compliance by implementing an international standard for the automatic exchange of information related to US taxpayers.


  • FATCA regulations require tax authorities obtain detailed account information for US taxpayers on an annual basis.
  • It requires U.S. persons, including those living overseas, to report their financial accounts held outside of the U.S.
  • It also requires non-U.S. financial institutions to report details of their U.S. clients to the Internal Revenue Service (IRS).
  • It imposes tax withholding where the applicable documentation and reporting requirements are not met.
  • Regardless of whether a country signs an intergovernmental agreement with the U.S., FATCA requires foreign financial institutions (FFIs) to register with the IRS and report information about financial accounts held by U.S. taxpayers. If the FFI does not comply, the IRS can impose a 30 percent withholding penalty on U.S. payments made to the FFI. However, once a country enters into an agreement with the U.S., individual FFIs no longer have to register with the U.S. Internal Revenue Service (IRS), reducing their compliance burden.
  • US person: Under FATCA, a U.S. person is defined as a citizen or resident of the U.S. (including a green card holder), a U.S. incorporated entity (including partnerships and trusts), or a non-U.S. incorporated entity having shareholding of 10 percent or more held by a U.S. citizen, U.S. resident, individual with a U.S. mailing address, or U.S. incorporated entity.
  • Foreign Financial Institution: FATCA defines foreign financial institutions as depository institutions (for example, banks), custodial institutions (for example, mutual funds), investment entities (for example, hedge funds or private equity funds), interests in foreign partnerships, and insurance companies that have cash value products or annuities.
  • Exemptions under FATCA: The following financial institutions are exempt from reporting under FATCA:
  1. Most governmental entities
  2. Most non-profit organizations
  3. Certain small, local financial institutions
  4. Certain retirement entities.

Common Reporting Standard

  • It is developed by the Organization for Economic Cooperation and Development (OECD),
  • It is a global reporting standard for the automatic exchange of information (AEoI).
  • The goal of CRS is to allow tax authorities to obtain a clearer understanding of financial assets held abroad by their residents, for tax purposes.
  • FATCA and CRS have similar characteristics on the surface, but underneath there are major differences. CRS is more wide reaching and requires a unified, cross-team effort to ensure readiness and compliance.

India and FATCA

On July 9, 2015, U.S. Ambassador to India Richard Verma and Indian Revenue Secretary Shaktikanta Das signed an agreement to implement the FATCA.

The agreement requires the Indian Financial Institutions to provide necessary information to Indian tax authorities, which will then be transmitted to the US automatically.

The Indian agreement promotes mutual information sharing, meaning that the U.S. will also share financial information on Indian residents who have investments in the U.S. with the Indian Ministry of Finance.

Benefit of signing FATCA for India

  1. By signing the agreement, the Indian government can shield Indian financial concerns from facing withholding taxes in the U.S. for failing to disclose the dealings of U.S. citizens and entities.
  2. The fear of U.S. withholding, and the burden of compliance, has caused several Indian mutual funds to bar U.S. residents and U.S.-based Non-Resident Indians (NRIs) from investing in their funds. Now that Indian financial institutions do not have to directly register with the IRS, they can now accept funds from them.
  3. This in turn will increase the flow of US fund to India.


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