The Game Changer: Global Transparency

The Foreign Accounts Tax Compliance Act (“FATCA”) is a US law created to enforce tax compliance by US persons holding banking and financial assets and accounts outside the USA.

Intergovernmental agreements (IGAs) have been signed or agreed by the US with more than 100 partnering jurisdictions in order to roll out FATCA to the domestic legislation of such jurisdictions. FATCA and most IGA are effective as of July 2014.

  • Under FATCA and IGAs the Foreign (non-US) Financial Institutions (FFI) are required to identify amongst its financial account holders in a due diligence procedure those account holders who are US persons. Then on annual basis these FFI are required to report certain personal and financial information of those US reportable accounts to the AEOI Portal of the local tax authorities, who will subsequently automatically exchange such information with the IRS. 
  • All other entities worldwide are either Active or Passive Non-Financial Entities.  Individuals and the NFE’s have to disclose its FATCA status to the Banks and other FFIs where they hold accounts, whereby the Passive NFE also have to disclose any substantial US owners or US Controlling Persons.
  • For background information on FATCA and the IGAs, reference is made to:

FATCA and the IGAs paved the way for introducing a global standard, endorsed by G20 and developed by the OECD.

The Common Reporting Standards (“CRS”) and Competent Authority Agreement (CAA) is the new global Standard for Automatic Exchange of Information (AEOI) of financial accounts, also called the Global FATCA, or GATCA.

  • It requires the Financial Institutions (FI) in the CRS Participating Jurisdictions to identify those financial account holders who are tax residents of other CRS Reporting Jurisdictions.
  • Then on annual basis these FI’s are required to report certain personal and financial information (dividends, interest, sales proceeds) of those CRS reportable accounts to the AEOI portal of the local tax authorities who will then automatically exchange the information to those tax authorities of Reportable Jurisdictions where the reportable account holders are tax resident.
  • It includes accounts held by individuals and entities, including trusts and foundations. If the account holder is an entity, classified as a so-called Passive Non-Financial Entity, then the FI’s also need to report their Controlling Persons who are tax resident of a CRS Reporting Jurisdiction.

CRS has been rolled out globally by more than 100 jurisdictions who have to activate exchange relationships under the Multilateral or Bilateral Competent Authority Agreement (CAA) :

  • As of January 2016 for 49 early adopter countries including EU countries, Mexico, Argentina, Colombia, India, and CDOT countries like Cayman Islands and British Virgin Islands (BV), with first exchange per 30 September 2017.  
  • CRS is being rolled out as of 2017 for at least 50 late adopter countries who committed to CRS and are implementing CRS in domestic legislation, with first exchange per 30 September 2018.
  • Check which CRS regime is applicable:

The CRS system is in addition to FATCA and the Inter-Governmental Agreements (IGA), with the main difference that FATCA and IGA is to report account holders who are US persons while CRS is to report those account holders who are tax resident of other CRS Reporting Jurisdictions. 

The impact of both FACTA and CRS create severe impacts not only upon High-Net-Worth Individuals (HNWI) whom financial account information will be reported and exchanged. These HNWI’s have to ensure that those financial accounts are properly disclosed, to the extent required, to the local tax authorities where they are tax resident. As a result of CRS the banks and other Financial Institutions are facing increased compliance and reporting requirements, as well as ongoing scrutiny from governments due to newly imposed compliance reporting systems.

For more background information on CRS and the commitments and activation of the exchange relationships by the various jurisdictions reference is made to: