American NRIs who invest in India
are up in arms that since April this year a large number of Indian mutual funds
have stopped accepting investments from them. Some mutual funds' websites
explicitly say so, while others have opted for quietly discouraging any such
investors that turn up. And this sudden unwelcome attitude towards a formerly
favoured class of investors is not limited to fresh mutual fund investments.
Some
mutual funds are said to be preparing to weed out existing NRI investors, and
something similar is going on with stock brokerages, banks and even some real
estate developers. Predictably, many NRIs are protesting through various
channels, both formal and informal, to the financial institutions which are suddenly
treating them as outcasts as well as to the government. Unfortunately, even
though the situation may improve, it is unlikely to go back to the way it used
to be in the good old days. Regardless of the fervour they displayed at Madison
Square Gardens (MSG), the days when US-based NRIs' investments were welcome
everywhere is over for good.
Foreign Account Tax
Compliance Act (FATCA)
The
reason it won't change is that this issue is much broader than just NRIs or
India. From April this year onwards, under a new US law, it has become
extremely onerous for any financial institution around the world to deal with
'US persons', which includes US citizens, green card holders and some other
types of people and entities. Broadly, the Foreign Account Tax Compliance Act
(FATCA) makes it compulsory for all Financial Institutions in the world to
report to the US Government comprehensive details of all transactions involving
these 'US persons'. The obvious question is so what? What authority does the
Unites States Government have to force businesses in other countries to do its
bidding? But if you think about it, the answer is also obvious. Legally, the US
Government has no actual authority.
However,
what it does have is a big (financial) stick with which it is willing to beat
up anyone in the world who doesn't do what it says. If a financial company
doesn't collect and report this data to the US government, and it has any
assets in the United States, then the US Government will confiscate 30% of
those assets as a withholding tax. This also applies to any connected business
— what we would call a group company. Of course a confiscation of 30% of assets
would utterly destroy any financial business.
From
what we learned, the problem is that complexity and cost of compliance is
considerable, and the punishment for making a mistake is huge. Therefore, what
FATCA boils down to is that if you have any intention of ever having any
financial dealings in the United States, then you need to work as an unpaid tax
collector for Uncle Sam, chasing down its citizens around the world. Take it or
leave it. As said earlier, FATCA is far more than an NRI or India issue, but it
does have a large impact on India.
Citizenship-based
taxation rather than residency-based taxation
The
root cause is that the US is apparently one of the only two countries in the
world that has citizenship-based taxation rather than residency-based taxation.
FATCA has had a huge impact on the desirability of having Americans as
customers by financial businesses around the world and NRIs in India are no
exception. The curious thing is that according to the official database that
one can download from the US Internal Revenue Service's (IRS) website, more
than four hundred Indian entities have signed an agreement of compliance with
the IRS. This even includes some real estate developers.
The solution to the
problem lies in Washington DC.
However,
anecdotal reports suggest that many, even some of the ones who have signed up,
are turning down business from US citizens. It looks likely that many financial
businesses will sign the compliance agreements with the IRS, but may still
avoid US citizens in order to avoid the cost, complexity and risk of reporting.
At best, they'll limit themselves to dealing with a handful of lucrative
accounts. That'll be a problem for a huge number of NRIs. Unfortunately, the
solution to the problem lies not in New Delhi or Mumbai, but in Washington DC.
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