What is the full form of FATCA
FATCA: Foreign Account Tax Compliance Act
FATCA stands for Foreign Account Tax Compliance Act. This tax requires U.S. persons at home or abroad with financial assets outside of the US to file annual reports of their foreign account holdings and accordingly pay U.S. tax. As per this tax, the U.S. taxpayers have to report yearly all of their assets held outside of the country. We can say that it promotes cross-border tax compliance through the international standard for the automatic exchange of information related to U.S. taxpayers.
FATCA aims to increase the transparency for the Internal Revenue Service (IRS) with respect to U.S. persons who may have invested and earned profits through overseas non-US institutions.
Non-U.S. Foreign Financial Institutions (FFI) and Non-Financial Foreign Entities (NFFE) are also required to comply to this law by disclosing the identities of U.S. citizens and the value of their assets held in their banks to the Internal Revenue Service (IRS) or the FATCA Intergovernmental Agreement (IGA). FFIs, which do not follow the IRS, are supposed to be excluded from the U.S. market and also required to pay 30% of the amount of any withholdable payment as a tax penalty.
The FFIs and NFFEs that comply with the law are required to report the name, address, and tax identification number (TIN) of each account holder, which is a U.S. citizen. They also provide the account number, the account balance and deposits and withdrawals in a financial year.
The U.S. Tax Department launched FATCA in 2010 as part of the HIRE Act to encourage transparency in the global financial services sector and to promote tax compliance and prevent tax evasion. It is different from CRS, which is a more advanced version of FATCA and is applicable for citizens of every registered country.
So, FATCA is a measure to prevent tax evasion by American citizens and businesses that are earning taxable income in other countries. However, it is not illegal to invest, operate or earn income outside the country, but it is illegal if someone doesn't disclose account as the US taxes all income and assets of its people whether in or outside the country.