On July 9, 2015, U.S. Ambassador to India Richard Verma and Indian Revenue Secretary Shaktikanta Das signed an agreement to implement the Foreign Account Tax Compliance Act (FATCA). The agreement is designed to increase transparency between the two nations on tax matters. The agreement takes effect September 30 and underscores growing international cooperation to end tax evasion.

FATCA targets non-compliance by U.S. taxpayers using foreign accounts and is quickly becoming the international standard for curbing tax evasion. The law requires U.S. persons, including those living overseas, to report their financial accounts held outside of the U.S. It also requires non-U.S. financial institutions to report details of their U.S. clients to the Internal Revenue Service (IRS).

Over 100 countries have already signed an agreement with the U.S. The Indian agreement promotes mutual information sharing, meaning that the U.S. will also share financial information on Indian residents who have investments in the U.S. with the Indian Ministry of Finance (MoF).

Regardless of whether a country signs an intergovernmental agreement with the U.S., FATCA requires foreign financial institutions (FFIs) to register with the IRS and report information about financial accounts held by U.S. taxpayers. If the FFI does not comply, the IRS can impose a 30 percent withholding penalty on U.S. payments made to the FFI. However, once a country enters into an agreement with the U.S., individual FFIs no longer have to register with the U.S. Internal Revenue Service (IRS), reducing their compliance burden.

By signing the agreement, the Indian government can shield Indian financial concerns from facing withholding taxes in the U.S. for failing to disclose the dealings of U.S. citizens and entities. The fear of U.S. withholding, and the burden of compliance, has caused several Indian mutual funds to bar U.S. residents and U.S.-based Non-Resident Indians (NRIs) from investing in their funds. Now that Indian financial institutions do not have to directly register with the IRS, that burden will lessen, as will the concern of attracting a withholding penalty.

However, removing the registration burden does not remove an FFI’s responsibility to report financial information about U.S. persons to the IRS. And, in fact, that burden is quite substantial.

If you are a specified U.S. person with foreign financial assets greater than US $50,000, you must report your income under FATCA using Form 8938. This is true regardless of whether those foreign financial assets will affect your tax liability for the year. However, if you do not have to file an income tax return for the tax year, you do not have to file Form 8938, even if the value of your specified foreign financial assets is more than the appropriate reporting threshold.

Because India signed the FATCA agreement with the U.S., Indian FFIs will report the financial accounts of U.S. specified persons to the MoF, and the MoF will report the information to the IRS. Indian FFIs no longer have to file individually with the IRS