FATCA, CRS compliance and international tax law

FATCA reporting at the core of information sharing for tax purposes

The international tax world changed on March 18, 2010 when the Foreign Account Tax Compliance Act was signed into law by the United States House of Representatives as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA has created a reporting standard for US persons, foreign financial institutions and other institutions that have financial assets outside the US. Failure to comply can be very expensive.

The crux of FATCA is that foreign financial institutions (FFIs) must search their customer records for evidence that US persons for tax purposes have an indicia, or indicator of a connection, to the United States.  The FFI is then required to have the owner of the account provide a W-8, if they are a foreign person for tax purposes, or a W-9 if they are a US person for tax purposes. The financial assets and identities of those US persons, and their family members who control financial assets, are shared with the Internal Revenue Service (IRS).

Such individuals with offshore financial assets must report their financial assets to the IRS annually by submitting the informational return 8938. Any FFIs, or their governments, which enter into an agreement with the IRS to supply the indicia of their customers may be subjected to 30 percent withholding on certain US-sourced payments if they do not comply with FATCA rules. The taxpayers may be assessed a penalty for noncompliance on their Form 8938.

The impetus for FATCA was financial scandal. The Swiss investment bank and financial services company UBS was revealed to have helped customers evade taxes. UBS was required to pay a $780 million fine to the US Department of the Treasury ($108 million of it went to the whistleblower who revealed client banking information, a violation of Swiss law, after over two years of imprisonment). The UBS scandal drove the need to increase required disclosure of financial assets held by US persons and their families outside the US. Previous reporting regimes had been essentially voluntary and ineffective.

FATCA reporting is here. Are you in compliance?

FATCA Implementation and enforcement.

Under FATCA, the US enters into an agreement with foreign countries whereby FFIs are required to gather information about US persons with assets in their financial institutions, and either report those assets to their own governments, who annually report them to the IRS (Model 1 agreement), or require FFIs to directly report them to the IRS annually (Model 2 agreement).

This type of legal and financial arrangement where the US government unilaterally required foreign financial institutions to comply with the laws of another government was unprecedented at the time. It was also controversial, at the very least because the foreign country and its financial institutions were effectively required to implement FATCA. Estimates of hundreds of millions of implementation costs and tens of millions of maintenance costs, to be borne by FFIs, were not uncommon. But FATCA was recognized by governments and financial institutions alike as a law that needed to be enacted to enforce information sharing with tax authorities.

What can a FATCA attorney do for you?

Not all financial assets must be reported under FATCA rules, and not all FFIs are required to register and report under the program. There are reporting thresholds that vary and may obviate the need to report certain financial assets. Payments from foreign governments do not have to be reported. Also, certain types of financial institutions may not have to register under FATCA. The point is that a FATCA attorney like THEVOZ can help you sort out your responsibilities under FATCA. Just remember that there is an onerous penalty for failure to file an accurate and complete Form 8938.

Common Reporting Standard (CRS)

As part of the Automatic Exchange of Information (AEOI), the Organization of Economic Cooperation and Development (OECD) developed the Common Reporting Standard (CRS). CRS reporting is an agreement for signatories to share information about financial accounts held in financial institutions in their countries. The financial information collected under CRS is forwarded to the state where the account holder is resident. Any penalty for the taxpayer is determined by the tax authorities in the country of residence of the asset holder. Information collected under CRS includes:

  • Name, address, Taxpayer Identification Number (TIN) or Personal Public Service Number (PPSN) and date and place of birth of each Reportable Person.
  • Account number
  • Name and identifying number of the reporting financial institution;
  • Account balance or value as of the end of the relevant calendar year (or other appropriate reporting period) or at its closure, if the account was closed.
  • Capital gains, depending on the type of the account (dividends, interest, gross proceeds/redemptions, other)

THEVOZ Attorneys understands that standards like FATCA and CRS reporting, and foreign tax laws in general are daunting and complex. There can be consequences for misreporting and other FATCA and CRS compliance issues, but understanding the standards requires knowledge and judgment.

FATCA can be vicious! Read about the first criminal conviction under FATCA regulations.

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