NEW Delhi is gearing itself to sign an agreement with Washington to protect Indian financial institutions from a contentious US legislation that is looking to penalize entities that fail to report dealings of American residents to the US revenue authority.

To comply with FATCA, Reserve Bank of India is drafting an agreement enabling domestic legislation. The Foreign Account Tax Compliance Act, due to come into force next year, proposes a 30% withholding tax on any payment made to a foreign financial institution by a US firm if it does not comply with the regulation. Indian government's proposal seeks to apply on any Indian financial institutions dealing with a US resident directly or indirectly will have to ensure compliance with FATCA.  

The FATCA, enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, aims to combat tax evasion by US nationals holding investments in offshore accounts. It is seen as advancement over the anti money laundering framework put in place by the Financial Action Task Force, a global body tasked with curbing money laundering.  

Under the provisions of the new law, US taxpayers holding financial assets outside the country must report those assets to the revenue authorities. The law also requires foreign financial institutions to report directly to the US   Internal Revenue Service   details of accounts held by US taxpayers or foreign entities in which US taxpayers hold a substantial ownership interest. Any entity failing to register will face a higher withholding tax rate from all US firms that they deal with.