What is FATCA ?
Foreign Account Tax Compliance Act (FATCA), effective as of 1 July 2014 is a law of United States.
What is the use of FATCA ?
This law is primarily designed to tackle tax evasion by US Citizens and US Companies who keep their savings and investments overseas and do not inform Internal Revenue
Service (Tax department of US Government)
Am I affected?
Many countries (like UK) in the world have signed `Inter-governmental agreements` with US Government.
This means all banks operating in the UK have to comply with FATCA provisions.
If you open personal or business bank accounts your bank will ask you to fill in a form. You may wonder why you need to complete this form as you have no connection with the US.
The issue here is, you know that that you have no connection with US but your bank does not know that. You are being asked to complete this form as a confirmation that you have no connection with the US.
Most of the forms are straight forward but form W-8BEN-E is a bit complex thus I thought I will write about it.
Most of the legal entities (Companies, partnership, trust etc) in the UK with no connection with US, will be classified as Active Non-Financial Foreign Entity (NFFE).
Note – This article is written as a very simplified guidance to FATCA, your circumstances may be different. Please go to IRS website (click here) to get more information.
Agreement between countries not to tax the same income twice.
To illustrate, a UK company does some business in India. Indian tax authorities will rightly ask the company to pay tax on that Income in India. UK tax authorities may also ask the company to pay tax on its Indian Income to them. To avoid this double taxation which is unfair for the tax payer, countries usually enter into these agreements to make rules among themselves as to which countries will collect tax on certain income and the other country will not ask the tax payer to pay tax on that income if her had already paid tax to the other country.
Let’s examine this by a numerical example :
UK Company earns £100 by a business in India. Both UK and Indian Tax rate is at 30%
|Tax Calculation (without DTAA)
Indian Tax @ 30% £30
UK Tax@30% £30
Net Income £40
Total Tax Liability £60
|Tax Calculation (with DTAA)
Indian Tax @ 30% £30
UK Tax@30% £30
Indian tax already paid £30
UK Tax Liability NIL
Total Tax Liability £30
Thus it is clear from the above example that UK tax authorities give rebate for the tax already paid to Indian tax.
Next, as this is an agreement between two countries, in case there is a conflict between the local laws (tax laws or any other law) and the DTAA provisions. Provisions of DTAA prevail.
So why to countries sign these agreements at all, will they not be better off charging tax payers as much as possible?
Governments enter into these treaties to minimize the vagueness of taxation rules in regards to international trade this improves certainty for businessmen which in turn encourage them to expand the trade ,increasing employment and in turn living standard of the general population.
Misuse of DTAAs – Indian example
Mauritius is a small island nation in the India Ocean with a population of 1.2m people but as per Government of India’s own records it has invested circa 40% of all the foreign direct investment during the period of 2000 to 2011.Click here
Even a UK banker was punished by UK regulators who was involved in arranging an investment for Reliance ADA Group via Mauritius . For more details see the UK tribunals order , read page 21
To be continued…