FATCA Full Form and Key Objectives

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FATCA Full Form and Key Objectives

FATCA full form is Foreign Account Tax Compliance Act. It is a US-based law enforced in 2010, as part of a larger piece of legislation known as Hire Incentives to Restore Employment (HIRE) Act. It is an essential statute for preventing tax evasion by US taxpayers via foreign financial accounts. 

What is FATCA Full Form?

The full form of FATCA is Foreign Account Tax Compliance Act. It is a crucial piece of legislation introduced in 2010, by the US Government, to target non-compliance by US taxpayers. It was passed as part of the HIRE Act. 

FATCA requires foreign financial institutions and certain other-financial entities to report information, on foreign assets held by US account holders, to the U.S. Internal Revenue Service (IRS). Through this, the IRS ensures that US taxpayers report their global income in an accurate manner and pay taxes in accordance with the applicable US laws.

At present, a total of 113 countries across the world follow FATCA via FATCA model agreements. This includes countries like the U.K., Singapore and Australia. However, around 95 countries do not have FATCA agreements with the USA. This includes tax haven countries, such as Monaco, Belize and Argentina.

Key Objectives of FATCA

The key objectives of FATCA are as follows:

• The primary goal of FATCA is to reduce tax evasion by US taxpayers having foreign accounts.

• It aims to increase transparency in the US tax system by ensuring that US-based taxpayers comply with the tax laws in their country. 

• Another goal of FATCA is to allow the Internal Revenue Service (IRS) to identify individuals who are not compliant with the US tax laws and take appropriate action against them.

• FATCA ensures that US taxpayers do not hide assets in offshore accounts and pay the right amount of tax on their overall income.

Compliance Requirements Under FATCA Act

The FATCA Act requires Foreign Financial Institutions (FFIs) to report certain details pertaining to US taxpayers’ financial accounts with the Internal Revenue Service (IRS). The details include account balances, certain transactions and the account holders’ identity. 

Additionally, Foreign financial institutions (FFIs) are required to confirm that they’re following the rules set out by FATCA (the Foreign Account Tax Compliance Act). If they don’t meet the necessary reporting obligations, they risk facing a 30% withholding tax on certain US-source payments like interest, dividends and other types of income. To avoid this tax, FFIs need to sign an agreement with the IRS and report specific information about their U.S. account holders.

It’s not just banks that need to comply with FATCA requirements. Other foreign entities like trusts and partnerships also have to report details about US-based taxpayers to the IRS. On the flip side, US-based taxpayers must disclose their foreign financial accounts on their tax returns if the total value goes over a certain amount. They might also need to report other foreign financial assets based on how much those are worth.

All FFIs and relevant foreign entities that fall under FATCA are required to file reports on a yearly basis by using the correct forms and by the proper deadlines. To prove they’re staying compliant, they also have to keep thorough records.

Foreign Assets Exempt from FATCA Reporting

The following foreign assets are exempted from FATCA reporting requirements:

• Foreign-held real estate

• Cash

• Precious Metals like Gold and Silver

• Foreign Social Security Equivalent

• Foreign Assets Reported Using IRS Forms like 5471, 8865, 8858, 8621 and 3520 

Conclusion

FATCA stands for Foreign Account Tax Compliance Act. It aims to prevent tax evasion in the United States of America. Under FATCA, US-based taxpayers must disclose their foreign accounts during tax returns if the total value exceeds a certain threshold limit. Additionally, the law requires Foreign Financial Institutions (FFIs) to provide to the Internal Revenue Service (IRS) a report regarding the foreign assets held by US account holders. Overall, FATCA ensures transparency in the US-tax system and reduces fraudulent activities by taxpayers in the USA.

Frequently Asked Questions (FAQs)

Q1. What is the full form of FATCA? 

A. The full form of FATCA is Foreign Account Tax Compliance Act.

Q2. In which countries is FATCA applicable?

A. FATCA is applicable to the United States and all other countries that have signed a FATCA agreement with the United States to share financial information.

Q3. When did FATCA come into force?

A. FATCA came into force in 2010 in the USA.

Q4. Does India have a FATCA agreement with the USA?

A. Yes, India has a FATCA agreement with the USA. Both the countries signed this agreement in 2015.

Q5. Is foreign-held real estate exempted from FATCA reporting?

A. Yes, foreign-held real estate (outside of the USA) is exempted from FATCA reporting for the US-based taxpayers.

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