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International Head of Regulatory & Compliance Solutions, TMF Group
06 May 2021
Read time
5 minutes

FATCA and CRS reporting season approaches: what you need to know

The annual round of FATCA and CRS reporting is fast approaching, or is here already in certain jurisdictions. For the majority of countries who have agreements to participate in these schemes for the automatic exchange of information, the deadlines for filing reports fall in the first half of the year. For those Reporting Financial Institutions (RFIs) who took advantage of deadline extensions last year, put in place due to the Covid pandemic, this year’s reporting will have come around all too soon.

The Foreign Account Tax Compliance Act (FATCA) is a US federal law which aims to detect, deter and discourage tax evasion by US citizens. It demands increased transparency and reporting on foreign accounts. FATCA’s reporting requirements apply to foreign financial institutions with accounts held by US taxpayers, as well as foreign entities in which US taxpayers hold a substantial ownership interest.

The Common Reporting Standard (CRS) was based on FATCA and shares the same goal of combatting tax evasion. It does this by ensuring that tax authorities receive annual reports on the foreign financial accounts and assets held by their own taxpayers. RFIs must make annual submissions of financial account information to over 100 participating tax authorities around the world. In addition to defining what, how and by whom the information must be reported, CRS defines which accounts are affected and the due diligence procedures to be followed.

For both FATCA and CRS, late or incomplete reporting, or failing to report altogether, can result in fines and other penalties. Significantly, individuals including managers, directors, trustees and other corporate officers can be held personally liable for non-compliance.

Considerations for this year’s reporting

RFIs, particularly those operating in multiple jurisdictions, will need to be aware of some differences this time around, compared to last year’s reporting.

Firstly, RFIs will need to be mindful that their reporting exhaustively includes information on accounts for all jurisdictions that have implemented FATCA and CRS. For CRS, for example, Dominica, Kazakhstan, Liberia, Oman and Peru joined the list of countries last year, while Ecuador and Morocco are set for their first automatic exchange of information in 2021.

Another important development to be aware of is one of a more technical nature: the OECD has released an update to the XML schema that RFIs are required to use when submitting CRS reports electronically.

Following input from a number of jurisdictions and financial institutions, Version 2.0 of the CRS schema was introduced to account for a number of technical changes. While this updated schema was originally announced by the OECD back in June 2019, its use did not become mandatory until 1 January 2021. RFIs should check and ensure that they are using the most up-to-date version of the CRS schema, based on the local implementation of CRS regulations, to avoid any potential issues close to the reporting deadline.

Increased compliance obligations for RFIs

RFIs will need to ensure that they remain up-to-date with any changes introduced by local tax authorities to their respective implementations of FATCA and CRS, to avoid incurring penalties or fines by falling foul of new compliance requirements.

Luxembourg provides one such example of additional requirements being set out, with a new law that was introduced on 18 June 2020.

The law, which entered into force on 1 January 2021, imposes new obligations on Financial Institutions and Foreign Financial Institutions, by making modifications to both the FATCA law of 24 July 2015 and the CRS law of 18 December 2015.

Among the changes, one key development concerns nil reporting: where applicable, FIs and FFIs are now obliged to file nil reports for CRS – something that was previously only required for FATCA. The extension of this requirement to CRS is accompanied by a new penalty: €10,000 for those who are found to have failed to file a required nil report.

Additionally, Luxembourg RFIs are now required to keep a register of the actions and evidence used to comply with their reporting obligations for a period of ten years from the end of the calendar year in which they were required to report. Not only does this apply to both FATCA and CRS, but RFIs must also be able to demonstrate that they have adopted internal processes to ensure compliance with both laws.

The Luxembourg tax authority now also has the power to investigate this information and the related processes at any point during the ten-year period. Failure to comply with these obligations can result in a fine of €250,000, which can be increased by a maximum of 0.5% of the amounts not disclosed.

More changes in the pipeline

While not strictly relevant to this year’s round of reporting, it is prudent to keep abreast of potential future developments around the implementation of FATCA and CRS. The IRS and OECD introduce recommendations each year, many of which are subsequently implemented by tax authorities.

Discussions are already underway regarding potential updates for 2021 and beyond, including measures to extend the scope of annual automatic exchange of information to account for digital platforms.

The seventh amendment to Directive 2011/16/EU (DAC7), originally proposed on 15 July 2020, was approved by the EU Council on 22 March this year. This amendment draws inspiration from the OECD’s “Model Rules”, which seek to bring cryptocurrencies and other forms of e-money into scope, as the global economy becomes increasingly digitised. The rapid evolution of digital means of transacting, and their potential to become more relevant in the future, represent a challenge for tax authorities as their reduced traceability could potentially lead to tax evasion. There will likely be an impact on FATCA and CRS reporting as a consequence.

Talk to us

Given that the scope of reporting and reporting requirements can change, it makes good sense to be prepared for new compliance obligations ahead of time. As highlighted by the new law introduced in Luxembourg, the penalties associated with non-compliance can be significant.

TMF Group’s global network of local experts are uniquely positioned to assist you with all aspects of FATCA and CRS reporting: from classification through to new account onboarding and establishing robust due diligence processes.

For more information, make an enquiry.

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