What is FATCA Reporting and CRS Reporting?

Efforts to enhance global tax compliance and combat evasion have led to key frameworks like the U.S. Foreign Account Tax Compliance Act (FATCA) and the OECD's Common Reporting Standard (CRS). FATCA targets taxpayers with foreign accounts in the United States, while CRS reporting facilitates the global exchange of financial account information, it also promotes transparency and international cooperation.

FATCA reporting, enacted by the Federal Government, aims to prevent tax evasion by reporting financial accounts held by U.S. taxpayers in foreign financial institutions. Similarly, CRS reporting serves as a global standard for the automatic exchange of financial account information and fosters cooperation in tackling tax evasion.

In this blog, we will discuss the FATCA filing requirement, its benefits, and its impact in detail.

What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) is a U.S. tax information-reporting framework and law that requires financial institutions (FIs) to identify accounts held by U.S. taxpayers.

This is achieved through enhanced due diligence procedures and regular reporting to the U.S. Internal Revenue Service (IRS) or to the relevant government authority, which involves Intergovernmental Agreements (IGAs). FATCA aims to prevent tax evasion by improving transparency around foreign-held financial accounts.

What is CRS?

The Common Reporting Standard (CRS) is a globally adopted framework for the automatic exchange of financial account information. CRS, developed by G20 countries and the OECD, standardised how jurisdictions collect financial account details from institutions and share this information annually. Similar to FATCA reporting, CRS reporting seeks to enhance global tax compliance and greater transparency and collaboration between countries.

What is the Impact of FATCA and CRS?

An entity’s classification under FATCA and CRS significantly influences its compliance obligations and FATCA reporting requirements. These impacts differ for Financial Institutions and Non-Financial Entities:

Impact on Financial Institutions

Entities must assess whether they qualify as financial institutions under the definitions of FATCA and CRS. Financial institutions must fulfil extensive due diligence, reporting, and compliance requirements mandated by FATCA, CRS, and local laws. Even foreign institutions are required to identify and report U.S. account holders or face severe penalties.

These obligations include the identification of reportable accounts, the collection of relevant information, and the submission of reports to the appropriate authorities.

Impact on Non-Financial Entities

Non-financial entities (NFEs) may require to provide self-certification forms to Financial Institutions they interact with. These forms typically include declarations of the entity’s tax residence, FATCA and CRS status, and, in some cases, details about the entity’s controlling persons.

This information determines whether the entity's accounts are considered reportable under FATCA and CRS and ensures compliance with the respective reporting regimes. Many Offshore jurisdictions are required to comply with these reporting to avoid blacklisting.

Who is Affected by FATCA?

FATCA declaration impacts both Financial Institutions (FIs) and individuals who are classified as U.S. persons. The legislation imposes specific obligations on FIs and defines who qualifies as a U.S. person subject to FATCA reporting requirements.

FATCA classifies the following individuals and entities as U.S. persons for reporting purposes:

U.S. Citizens:

• Born in the United States (including the 50 states and District of Columbia), Puerto Rico, Guam, the Northern Mariana Islands (for those born on or after November 4, 1986), or the U.S. Virgin Islands
• The U.S. Citizenship and Immigration Services (USCIS) grants U.S. citizens citizenship

U.S. Residents:

• Green Card holders
• Individuals who spend substantial time in the U.S. (meeting the substantial presence test)
• Foreign-born children under 18 who reside with at least one U.S. citizen parent by birth
• Persons electing to be treated as U.S. residents for tax purposes for part of the year

FATCA Reporting Requirements for Foreign Financial Institutions

Under FATCA, Foreign Financial Institutions (FFIs) are obligated to conduct thorough due diligence to identify accounts held by U.S. persons. Once identified, FFIs must report detailed information about these accounts, including:

• Account Holder Details Name, address, and Tax Identification Number (TIN).
• Account Information: Account balance and income earned during the reporting period.

Additionally, FFIs are required to report on accounts held by foreign entities with significant U.S. ownership. They are required to first obtain their U.S. clients' consent to collect information and then report financial information directly to the IRS. For clients who don't agree to fill up the FATCA form, FFIs must deduct 30% withholding tax on all income.

Currently, 113 countries have agreements with the USA to follow FATCA requirements. 95 countries do not have any FATCA agreements, including tax havens including Belize, Maldives, etc.

Difference Between FATCA & CRS

FATCA and CRS are global frameworks that improve tax compliance, but they differ in scope, requirements, and application. Below is a comparison at a glance:

Challenges of FATCA Reporting

Implementing FATCA reporting has presented significant challenges for the banking and financial services industry globally:

• Entity scoping: A financial group needs to identify entities needing FATCA/CRS reports and maintain a register of their statuses.
• Operational Overhaul: Institutions must adopt complex onboarding processes to identify U.S. residents and comply with FATCA requirements.
• Data Limitations: Insufficient or fragmented client and account data often requires extensive data cleansing and consolidation efforts.
• Knowledge Gaps: Staff may lack expertise in FATCA’s complexities and it requires external guidance to ensure FATCA compliance.
• Tight Deadlines: Institutions face pressure to meet strict timelines to implement FATCA mandates.
• IT Integration: Linking multiple systems to enable seamless data aggregation and reporting can be challenging, especially with legacy systems.
• Report Generation: The FI must identify the reportable population and determine the value of the client's financial assets and gross payments from those assets at the end of the reporting year.
• System Upgrades: Enhances or builds systems to manage rules, generate reports, and monitor compliance demands significant resources.

Accounts that are Exempted from FATCA Reporting

FATCA regulations do not mandate every financial institution to collect and report information for all account types. The following account types and financial products are exempt from FATCA reporting requirements:

• Registered Education Savings Plans (RESPs)
• Tax-Free Savings Accounts (TFSAs)
• Registered Retirement Savings Plans (RRSPs)
• Registered Disability Savings Plans (RDSPs)
• Registered Retirement Income Funds (RRIFs)

FATCA and CRS have reshaped global tax compliance to improve financial transparency and reduce tax evasion. FATCA reporting targets U.S. persons, while CRS requires mandatory reporting across multiple jurisdictions. Both systems present challenges for institutions worldwide and include operational changes, data management, and compliance requirements. However, these regulations are crucial to enhance global tax accountability, and institutions must adapt to meet their obligations effectively. Our experts at Gryffin Capitalist will help you sort the report requirements. Contact us today for more information.