In 2010, the U.S. Congress enacted FATCA, the Foreign Account Tax Compliance Act, in an effort to stem the tide of U.S. persons using overseas accounts and assets for the purposes of tax evasion. As we have reported elsewhere on this blog, the structure of FATCA is two-fold. First, individual taxpayers must report their qualifying foreign income to the Internal Revenue Service (IRS). At the same time, the Foreign Financial Institutions (FFIs) that hold or process that income must report the identity of their qualifying U.S. clients to the United States.
Despite whatever headaches it may cause for corporate accountants and compliance officers, it is a regulation that has met with a measure of success. That may be one reason why, nine years later, the Organization for Economic Co-Operation and Development (OECD), at the behest of the G20 and the G8, proposed similar regulations under the name CRS, or Common Standard on Reporting and Due Diligence for Financial Account Information. In fact, some commentators, noting the similarities between the two initiatives, have dubbed CRS GATCA, or Global FATCA. Though both FATCA and CRS try to combat tax evasion, there are some notable differences between the two sets of regulations. Below, we’ll provide a breakdown of a couple of those differences, and how they might affect your business’s next decisions.
A Quick Switch in Terminology
Because FATCA deals in solely bilateral intergovernmental agreements, all reporting banks are labeled FFIs, as noted above. This terminology, though, is U.S.-centric, as it regards all other banks to be “foreign.” CRS uses the more inclusive moniker RFI, or Reporting Financial Institution, to reflect the reality of its multilateral nature. For the rest of this document, we will be using the acronym RFI to describe these banks, whether they refer to the U.S. for FATCA compliance or to other countries participating in CRS agreements.
Differences Between FATCA and CRS
One of the biggest differences between FATCA and CRS is the breadth of its design. Whereas FATCA requires financial institutions to report only those customers who qualify as U.S. persons, CRS involves more than 90 countries. Under CRS, virtually all foreign investments handled by a financial institution become subject to a CRS report.
Due in part to CRS’s wider scope, the nature of the relationships between financial institutions’ country and regulatory authority has also changed. Under FATCA, each country entered into a separate bilateral intergovernmental agreement with the United States. These agreements had two main objectives:
- Require local financial institutions to comply with FATCA reporting standards;
- Provide that doing so would not cause financial institutions to breach local data protection laws.
By comparison, CRS represents an international standard, which, by its very nature, is multinational. Countries wishing to take part in the CRS can do so in a variety of ways. For instance, they might:
- Ratify a legal instrument, such as a treaty that provides for the automatic, reciprocal exchange of information regarding financial accounts. Such instruments might also include a double taxation agreement that provides for automatic information exchange between the two countries, or a model convention known as the Multilateral Convention on Mutual Administrative Assistance on Tax Matters, which is designed to promote international cooperation for the betterment of international tax laws;
- Sign an OECD model competence authority agreement, wherein both parties agree to abide by CRS standards of due diligence and exchange information; and
- Enact legislation to impose due diligence requirements on all local RFIs.
Give a little, get a little
Part of FATCA’s power lies in its resolve to collect information from RFIs concerning the financial dealings of U.S. taxpayers. Initially, this relationship was entirely one-sided; thus, it was truly a collection, not an exchange. In subsequent years, at the insistence of the G20, FATCA has modified its position on data reciprocity, but it is still not an equal exchange. To note, under FATCA stipulations, the IRS is still not obligated to share information pertaining to:
- Cash accounts held by entities, including those that are resident in the FATCA partner jurisdiction;
- Non-cash accounts, whether held by individuals or entities, unless the accounts earn U.S.-sourced income; and
- ‘‘Controlling persons’’ of any entities that have accounts in U.S. financial institutions, regardless of whether those entities are from the partnering country, even if those entities are owned and controlled by residents of the partner jurisdiction.
While the move toward equal transparency is considered progress, the exceptions above still place the IRS at a considerable advantage. The CRS, by comparison, requires a full, reciprocal exchange of financial data from each partner who enters into the agreement. This has led to a much higher rate of participation; the number of multilateral CRS agreements exceeds 1,450, far outpacing those institutions engaged in FATCA partnerships.
Hold the Withholding Tax
One of the ways the IRS encourages compliance with its FATCA regulations is by imposing sizable penalties over those companies who fail to report their U.S. taxpayers’ list. Companies who register with the IRS agree to withhold 30% on certain U.S. payments to foreign payees if those payees do not provide verification of their taxpayer status. This puts the onus of the work of client identification and verification on the RFI, not the IRS.
By contrast, the CRS does not charge a withholding tax to any of the RFIs working under its provisions.
Problems With Exemptions
FATCA supplies a mechanism for taxing income earned or stored in offshore accounts, but it does not apply its rules equally across all entities. Instead, it has carved out a number of exemptions for certain business types and provided a de minimus limit, which, in effect, exempts all U.S. taxpayers whose foreign accounts have not exceeded $50,000. So, for example, a charity is not required to file FATCA reports, nor are companies that are part of a publicly traded exchange.
CRS offers no such exemptions for charity RFIs or publicly traded companies, and it sets no de minimus limits for its regulations. The only exemption it allows is for pre-existing accounts (prior to 2015) of a value of up to $250,000. This means that, in effect, virtually all other financial accounts held by individuals in every reportable jurisdiction are required to file with the CRS.
Because there is a common perception that CRS is simply a globalization of FATCA, many organizations make the mistake of thinking that because they are FATCA compliant, they will be CRS compliant as well. There are certain similarities, of course, but the truth is, making your company CRS compliance will require its own careful strategy. If you have questions about this process, or are curious about how entity management software can help, contact a Blueprint representative today.