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FATCA came into force in 2014. It requires foreign financial institutions (FFIs) to disclose their US clients’ accounts, either to their own domestic tax authority or directly to the US Internal Revenue Service (IRS).
At the time of introduction of FATCA there was no international exchange of account information. Later in 2014 the OECD published its own proposed global standard for the automatic exchange of information between any two tax authorities worldwide.
The Common Reporting Standard (CRS), according to the OECD was developed with a view to maximising efficiency and reducing costs for financial institutions.
CRS did draw quite extensively on the intergovernmental approach used to implement FATCA. Countries participating in CRS exchange account information with each other using the OECD’s Common Transmission System, which was modelled on FATCA’s International Data Exchange System.
CRS has now been implemented by many countries and exchange of information has begun.
This means that there are two reporting systems for sharing foreign account information from foreign financial institutions which are in operation globally—FATCA and the Common Reporting Standard (CRS).
There have been reports from banking associations that institutions have encountered challenges implementing and now maintaining two overlapping reporting systems for collecting and transmitting account information to other countries for a seemingly similar purpose and collecting sufficient information from customers to ensure they meet the requirements of both systems.
There have been calls for the US to move away from FATCA and implement CRS.
CRS reporting requirements are similar to FATCA in a lot of ways, including reporting of the account holders’ name and address, taxpayer identification number, account number, account balance, and income and sales proceeds.
However, there are differences. The biggest differences stem from the nature of the U.S. tax system.
The United States, like many jurisdictions taxes citizens and resident aliens on their worldwide income. However, the United States differs from a lot of other jurisdiction in that it generally subjects U.S. citizens who reside abroad to U.S. taxation in the same manner as U.S. residents.
In contrast to U.S. policy, most other countries do not tax their citizens if they reside in a country other than their country of citizenship.
Further, IGAs implementing FATCA require FFIs to report the foreign-held accounts of U.S. citizens and residents—including resident aliens—while CRS requires financial institutions in jurisdictions participating in CRS to report on almost all accounts held by non-residents of the reporting country.
These variations mean there are quite significant differences in due diligence procedures between FATCA and CRS.
FATCA aims to identify whether an account holder at a foreign institution is a U.S. person based on citizenship and tax residence, whereas CRS aims to identify the tax residence and does not consider citizenship.
Due to the multilateral nature of CRS, if an account holder is determined on the basis of the due diligence procedures to have residency in two or more countries, information would be exchanged with all jurisdictions in which the account holder is determined a resident for tax purposes. Under CRS rules, information about foreign accounts held by a U.S. citizen with a tax residence abroad would not be reported to IRS, but rather to the jurisdiction in which they were a resident for tax purposes.
Because the United States taxes the worldwide income of U.S. citizens, CRS rules would need to require identification of account holders’ citizenship in member countries where they are residents if FATCA were to be aligned with CRS.
If the US wanted to adopt CRS, some of the key differences between FATCA and CRS could be aligned through regulation while others would require legislation. According to the latest report by the US Congress’s General Accounting Office (GAO) to align FATCA and CRS, Congress would need to revise statutes to:
• provide for the collection of information for accounts that residents of other jurisdictions maintain at U.S. financial institutions;
• require certain U.S. financial institutions to report the account balance (including, where appropriate the cash value or surrender value) for all financial accounts maintained at a U.S. office and held by foreign residents;
• expand the current reporting required with respect to U.S. source income paid to accounts held by foreign residents to include similar non-U.S. source payments;
• require financial institutions to report the gross proceeds from the sale or redemption of property held in, or with respect to, a financial account; and
• require financial institutions to report information with respect to financial accounts held by certain passive entities with substantial foreign owners.
Whilst further aligning FATCA and CRS to some extent is possible, anything short of the US fully adopting CRS would not eliminate the burden of overlapping requirements of having to comply with two different systems.
A total alignment of FATCA with CRS would result in no additional benefit to the IRS in terms of obtaining information on U.S. accounts.
Further, adoption of CRS could create the situation where foreign accounts held by U.S. citizens with a tax residence in a non-US jurisdiction, including U.S. citizens who have a U.S. tax obligation, would not be reported to the IRS.
Such a move would also generate additional costs and reporting burdens to U.S. financial institutions that would need to implement systems to meet CRS requirements. The extent of these costs is unknown.
Whilst the proposition of the abolition of FATCA and a move to CRS would be attractive for FFI’s, the costs and downsides to the US Treasury and likely to mean that it remains an unlikely course of action for Washington to adopt.
For more information on non resident tax advice please contact a member of our team of international tax advisers who are on hand to help. You can also read more about non resident and non dom tax below…