India and the United States have reached an inter-governmental agreement that should make the successful prosecution of offshore tax evasion easier.
The agreement allows for implementation of the Foreign Account Tax Compliance Act (FATCA), which will soon apply to U.S. taxpayers living in India. Under the terms of FATCA, financial institutions in foreign nations (such as India) must provide information about the financial accounts and investments of U.S. taxpayers to U.S. tax authorities.
India is the latest nation to sign this agreement with the U.S., which has been seeking similar accords with other countries. The U.S. has reached FATCA agreements with 110 jurisdictions as of July 2015. The new rules become effective in India on October 1, 2015. The reporting period that begins on that date would cover July through December of 2014.
The U.S. hopes the widespread implementation of FATCA will deter tax evasion, as banks, brokers, insurers and other financial entities could face serious penalties for non-compliance. Any entity failing to register faces a higher withholding rate (30 percent) on all payments from U.S. firms. The new regulations should also make the activities of tax evaders easier to trace and prosecute.
By signing inter-governmental agreements, individual financial institutions are spared the trouble of reaching their own FATCA agreements with U.S. authorities.
The agreement offers reciprocity for both sides, as the U.S. will share information with India concerning the activities of Indian taxpayers in the United States.
One challenge that could arise in the implementation phase concerns the financial infrastructure in some of nations now operating under the terms of FATCA. Because of the rigorous and precise nature of FATCA regulations, operational issues may develop. As these infrastructures modernize, however, any challenges will likely seem minor when compared with the long-term enforcement value of FATCA.
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