Know about Foreign Account Tax Compliance (FATCA) & Common Reporting Standard (CRS)

During the expansion of the global economy, tax professionals have to deal with situations where it becomes essential to understand and implement international tax law. The tax professionals in the USA must work with two significant tax compliance standards: Common Reporting Standards (CRS) and The Foreign Account Tax Compliance Act (FATCA).

Even though both these regulations intend to promote global tax compliance, each has its unique traits. Tax experts whose expertise lies in International finances must have a comprehensive understanding of each structure to help their clients stay compliant even in a foreign country. This write-up is formulated for professionals who handle taxes for individuals as well as those who work with corporations or partnerships.

What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) has been developed since 2014. It is referred to as a law demanding Foreign Financial Institutions (FFI) across the world to record the financial data of U.S. Citizens. Moreover, suppose an FFI recognises accounts belonging to U.S. citizens. In that case, that organisation is obligated to report the account holder’s identity, inclusive of the assets present in the account of the U.S. Department of the Treasury. The primary purpose of FATCA is to ensure that Americans are docile with tax regulations, even when their assets are in a foreign country.

Another fact that people are unaware of is that FATCA does not apply to Americans with a foreign bank account, and not every nation complies with the regulation. Besides, 113 foreign authorities, including Cayman Islands, Switzerland, Bermuda, have been complying with FATCA in exchange for similar compliance from U.S. institutions.

Currently, many countries are in the process of operating an intergovernmental agreement with the U.S. However, countries like China may never sign an intergovernmental agreement to comply with the FATCA.

This law applies to any U.S. Citizen and U.S.-based entities possessing at least $50,000 with FFIs. 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.

Any taxpayer who fails to report assets at the starting may face a penalty of $10,000 for the initial offence, and it may come up to $50,000 in case of continued non-compliance. The ordinance of limitations for FATCA breaches is six years.

Tax professionals who provide tax compliance services must have proficiency in FATCA orders. Comprehending the law and related exceptions will assist the client in making wise decisions.

What is a Common Reporting Standard (CRS)?

Commenced by the Organization for Economic Cooperation and Development, the Common Reporting Standard (CRS) is a worldwide policy for automated 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.

As per the Cayman 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. FATCA concerns the assets of a few thousand entities and individuals; CRS is affected to millions. It was established for the first time in 2012 that an automatic reporting standard would necessitate precise information exchange, standardised reporting structures, and due diligence.

Developed to dismantle and limit tax evasion, CRS seeks to solve widespread concerns rather than replacing them. Former attempts at standardisation hardly forced non-compliant parties to transfer their funds to other nations of the world. CRS works as a more permanent solution. To limit the taxpayers to evade compliance, CRS takes the following approach;

• Scope of Reporting Institutions: CRS includes insurance companies, banks, collective investment channels, and brokers.
• Scope of Taxpayers In Regards to Reporting: CRS aims at shell companies, trusts, taxable entities, and individuals.
• Scope of Required Financial Information: CRS expects institutions to Report on various types of income, including dividends and interest.

Most importantly, Cayman Islands CRS and FATCA endeavour to achieve the same target — more global tax compliance through different but relatable means.

Difference Between FATCA and CRS

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.

Moreover, the account scope may be greater than FATCA’s as most inceptions applicable under FATCA do not apply to CRS. Also, the categories of entities providing information on the controlling person are relatively broad. Forms of IRS that is 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.

Another significant difference between CRS and FATCA is that the legal entity of CRS can differ substantially from FATCA legal entity classifications. This variation may necessitate a significant effort in the non-financial and financial services industries as they need to authenticate the category of entities across their affiliated circle. This will increase the cost of documentation and legal management classification.

Unlike FATCA, CRS does not inflict a withholding requirement. In fact, 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.

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, various tax authorities have their own requirement as to which the account holder jurisdictions are 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.