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FATCA leads MFs to avoid fresh investments from US investors

Non-compliance with FATCA entails 30% withholding tax on the US source payments

Press Trust of India  |  New Delhi 

Stringent compliance requirements under the Foreign Account Tax Compliance Act of the US have led to several mutual fund houses avoiding fresh investments from American investors.

To lower the reporting burden, many including HDFC MF, ICICI Prudential MF, Quantum MF and Baroda Pioneer MF, DSP Blackrock MF have even barred investment from residents of US and Canada for some of their schemes, while others are not very keen on investments from such entities.

Moreover, some MFs may even stop taking investments from NRIs till a clarity emerges over FATCA agreement between India and the US.

FATCA is a US law whereby foreign financial institutions across the world would have to report to the US Internal Revenue Service (IRS) on any transactions of clients who could be subjected to American tax laws.

The non-compliance with FATCA entails 30% withholding tax on the US source payments. Moreover, wrong or incorrect reporting may also have similar consequences.

While India and the US had agreed "in substance" last year to sign an Inter-Governmental Agreement over FATCA, the final pact could not be signed within the earlier deadline of December 31, 2014 and it had to be extended.

All financial institutions with exposure to the US were also required to register with the US tax department IRS under FATCA before January 1, 2015, RBI and Sebi had said late last month, but many Indian entities are yet to do so.

The US taxpayers under FATCA include US citizens, US residents (green card holders) and non-residents who own foreign financial accounts or other offshore assets.

Industry insiders says that MFs have stopped taking fresh investments from the US citizens because of stringent compliance laws.

"Most of the fund houses have stopped taking investment from citizens of US and Canada. Accepting investment from them means more paper work and more compliance," Quantum AMC CEO Jimmy Patel said.

Raghvendra Nath, Managing Director at Ladderup Wealth Management said: "Most MFs in India as well as other institutions are now refusing money from US based NRIs."

WealthRays Securities Director Rashmi Roddam said: "Since the disclosures are high, even US NRI's are reluctant in investing into Indian and so are mutual fund companies."

"Many of the are discouraging or rejecting NRI investment considering complexity and cost of compliance along with huge punishment for the mistake making the situation worse for the Indian mutual funds," said Abnish Kumar Sudhanshu, Director-cum-Research Head at Amrapalu Aadya.

All Indian financial institutions including stock exchanges, mutual funds, portfolio managers and depositories with exposure to the US were required to register with the American tax authorities by December 31.

"The FATCA provisions will have a big impact on flows from US," Nath added.

"The Indian mutual fund industry, which is attracting a significant flow from NRIs is likely to be impacted by new FATCA," Sudhanshu said.

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First Published: Sun, January 11 2015. 12:00 IST