FATCA and CRS/DAC - What financial institutions should be doing

FATCA

What is it?

FATCA (Foreign Account Tax Compliance Act) is US legislation introduced to force non-US financial institutions to pass information about the accounts of US persons to the IRS (Internal Revenue Service).

Why?

The US Government is worried that US citizens are using offshore accounts to avoid paying US tax and therefore, wishes to have details of offshore accounts. The 30% "withholding tax" is effectively a penalty to try to force non-US financial institutions to comply with the US rules.

Who will be affected?

All foreign financial institutions (‘FFIs’) and any person dealing with FFIs. The definition of FFIs is extremely wide and, in addition to conventional financial institutions (such as banks and insurance companies), it includes anyone who engages primarily in the business of investing or trading in financial assets or derivatives and so will include many foreign investment vehicles.

Inter-Government Agreements (‘IGAs’)

The US has entered into IGAs with over 70 jurisdictions (including the UK), with another 39 jurisdictions having reached agreements in substance. Under the vast majority of these IGAs (including the UK IGA),

1. the FFI has to provide reporting information to its own tax authority, rather than the IRS; and
2. FFIs are not subject to FATCA withholding tax unless they have been guilty of significant non-compliance for at least 18 months and therefore been put on a published list by the IRS.

Reporting requirements

Under the IGA’s, FFIs have to identify and report on US reportable accounts (ie accounts held by US persons or entities controlled by US persons). Pre-existing accounts below certain threshold limits may not have to be reported under FATCA.

Commencement

UK FFIs were required to submit their report for the 2014 calendar year by 31 May 2015.
For the calendar years 2014 and 2015 there is a relaxed transitional period under which UK FFIs will be treated as FATCA compliant where they have taken all reasonable efforts to supply accurate information and establish appropriate governance and due diligence processes. It is therefore essential for UK FFIs to ensure that they have FATCA compliant systems and documentation in place.

Common Reporting Standard (‘CRS’)

What is it and why is it happening?

The CRS is the OECD’s global standard for the automatic exchange of financial account information between governments. It is part of the current global drive for tax and financial transparency and accountability. More than 51 jurisdictions (including the UK) have agreed to early adoption.

When?

The CRS initiative will be implemented on an EU wide basis through the recently revised Council Directive on Administrative Cooperation (‘DAC’). It is envisaged that information will be exchanged with non-EU jurisdictions under bilateral CRS Competent Authority Agreements.

The UK has implemented CRS and DAC. This provides the legal basis for UK financial institutions to collect and provide to HMRC the data required under CRS and DAC. UK financial institutions are to start the necessary client due diligence from 2016 and provide required client information to HMRC from 2017.

Who will be affected?

Financial institutions will have to update and amend existing client due diligence and new client on-boarding procedures by 2016 and start reporting to HMRC in 2017. Similarly to FATCA, the definition of financial institutions for CRS is extremely wide.

Anyone with overseas assets could be affected, especially individuals with undisclosed overseas assets or with complex affairs in relation to overseas assets. Tax authorities will be provided, through CRS, with details of these assets, possibly for the first time.

What information will be exchanged?

The following details will be exchanged between tax authorities in relation to affected individuals:

• Name, address, date of birth, National Insurance number (and name and address of entity, if relevant).
• Account number and details of financial institution.
• Annually, the account balance or value, the total gross amount of funds paid or credited to the account (ie income) and the aggregate of any sale or redemption of assets.

Differences from FATCA

The scope of CRS and DAC is much wider than that of FATCA: CRS is often referred to as ‘Global FATCA’.

Material differences include:

• Under CRS and DAC, it will be necessary to carry out due diligence and reporting for all account holders resident in a large number of different participating jurisdictions, not just a determination of whether an account is a US reportable account.
• Unlike FATCA, for CRS there is no de minimis threshold for pre-existing individual accounts. As such, a greater number of accounts will fall within scope.
• No global reporting template has been developed for CRS. This will lead to different reporting templates being used across several jurisdictions, including in the EU.
• CRS and DAC do not impose any registration or identification number requirements, which makes it difficult to distinguish between reporting and non-reporting financial institutions. For DAC purposes, a list of non-reporting financial institutions will be published by the European Commission in the Official Journal of the EU. What steps should you now take?

To become CRS and DAC ready, you should do the following:

• Undertake a review of your contracts and consider how these may need to be adapted to comply with the new reporting requirements.
• Undertake a data protection review to resolve any issues arising from compliance with CRS and DAC.
• Undertake an exercise to establish the tax residence status of all your clients.
• Undertake a review of your existing systems and practices to minimise the cost and disruption of rolling out your CRS and DAC compliance programme.

How can CMS assist you?

CMS can assist you in the following ways:

• Keeping you informed of any FATCA, CRS and DAC developments.
• Providing legal advice on the compliance obligations under FACTA, CRS and DAC, including on-site or document based compliance due diligence.
• Identifying any overlaps that are likely to arise with your current FATCA reporting framework.