It is essential to understand certain international tax legislation particularly as clients will have a global footprint. When it comes to the exchange of tax information, professionals worldwide must be familiar with two significant tax compliance standards: Common Reporting Standards (CRS) and The Foreign Account Tax Compliance Act (FATCA).
Both regulations intend to promote global tax compliance while having distinct characteristics. Professionals whose expertise lies in international finances and/or those having clients that may be indirectly impacted should have a comprehensive understanding of the legal requirements for FATCA and CRS to assist clients with remaining compliant. This write-up is formulated for professionals who advise on tax-related matters for legally defined persons.
The Foreign Account Tax Compliance Act (FATCA) has been in effect since 2014. It is referred to as a law requiring Foreign Financial Institutions (FFI) to record and transmit certain financial data of U.S. Citizens. Where an FFI recognises accounts belonging to U.S. citizens that organisation is obligated to report the account holder’s identity, tax identification number along with other information including the assets present in the account of the account holder. The primary purpose of FATCA is to ensure that Americans are docile with tax regulations, even when their assets are in a foreign country.
FATCA applies to any U.S. Citizen and U.S.-based entities possessing at least $50,000 with FFIs and anyone who falls within the purview of FATCA is obliged to report foreign-owned assets on form 8938. In some instances, assets, including retirement accounts, may not require reporting.
Persons may not be aware that FATCA does not apply to Americans with a foreign bank account, and not every nation has signed on to the FATCA regulation. While some countries are tax neutral and do not receive tax information for themselves, 113 foreign authorities, including the Cayman Islands, Switzerland, Bermuda, have signed an intergovernmental agreement which governs the exchange of information for FATCA.
While many countries are in the process of abiding by an intergovernmental agreement with the U.S., countries like China may never sign an intergovernmental agreement to comply with the FATCA.
As it relates to non-compliance, there are many penalties including fines that are a percentage of the foreign assets that can depend on the type of non-compliance such as willful non-disclosure and non-willful disclosure. The ordinance of limitations for FATCA breaches is six years.
Tax professionals who provide tax compliance services must have proficiency in FATCA orders as understanding the law and related exceptions will assist the client in making wise decisions.
Commenced by the Organisation for Economic Cooperation and Development, the Common Reporting Standard (CRS) is a worldwide policy for the automatic exchange of information. The fundamental goal of CRS is to provide governments with a more reliable view of the financial assets of their country’s citizens. This act may seem the same as FATCA but comes with many differences; the primary difference is; FATCA is tax reporting information for the US, while CRS is tax information reporting for the rest of the world.
Developed to dismantle and limit tax evasion, CRS seeks to solve widespread concerns rather than replacing them with a view that prior attempts at standardisation hardly forced non-compliant parties to transfer their funds to other nations of the world. CRS is intended to work as a more permanent solution.
To limit the taxpayer’s ability to evade tax compliance, CRS takes the following approach;
Most importantly, CRS and FATCA endeavour to achieve the same target – more global tax compliance through different but relatable means.
Although the Common Reporting Standard (CRS) is dependent on the Model 1 Intergovernmental Agreement (Model 1 IGA) approach of The Foreign Account Tax Compliance Act (FATCA), there are some of the fundamental differences that need remediation specific onboarding, processes, and reporting enhancements. For Instance, the reach of CRS is more extensive than FATCA as it strives to identify financial institutions tax residents in one of the jurisdictions operating in CRS.
For CRS compliance, no matter what amount of assets an individual or entity holds, they must be registered to the appropriate tax authorities. Besides that, the definition of reporting financial institutions is much broader under CRS in comparison to FATCA.
CRS incorporates a more comprehensive range requiring information for residents of over 90 countries. It was established for the first time in 2012 that an automatic reporting standard would necessitate precise information exchange, standardized reporting structures, and due diligence. CRS implementation will be managed by each of the jurisdictions adopting CRS that needs to develop a penalty and audit regime for lack of compliance with the rules.
Moreover, the account scope may be greater than that of FATCA as most exceptions applicable under FATCA do not apply to CRS. Additionally, the categories of entities providing information on their controlling persons are relatively broad. IRS Forms such as Forms W-8 and W-9 are mostly not acceptable and financial institutions will require accurate self-certifications to cover the CRS requirements. For Instance, self-certification must allow the account holders to provide CRS classifications or verify multiple tax residences that differ from FATCA. Unlike FATCA, CRS does not impose a withholding requirement.
Another significant difference between CRS and FATCA is that the legal entity of CRS can differ substantially from the FATCA legal entity classifications. This variation may necessitate a significant effort in the non-financial and financial services industries as there is a need to authenticate the category of entities across their affiliated circle which can increase the cost of documentation and legal management classification.
One essential challenge correlated with CRS is that even though the standard proposes to enact uniform requirements across the jurisdictions accepting this new regime of reporting global financial information, the reality is slightly different as each jurisdiction has been given authority to exercise different options and expand the qualifications specified in the standard. In addition, as various tax authorities have their own requirement there can be multiple jurisdictions to which the account holder is considered to be reportable.
Above all, the data privacy and protection rules with residency definitions can vary from one country to another. Hence, it is advisable to choose reliable tax compliance services to determine the best way to meet the requirements of various jurisdictions.