FATCA: What it is, how it works and the main differences to CRS

Introduction

The Foreign Account Tax Compliance Act (FATCA) is a key piece of US legislation aimed at combating tax evasion by US citizens with foreign accounts. Enacted in 2010, FATCA requires comprehensive reporting requirements for foreign financial institutions (FFIs) with respect to US account holders. This article looks at the intricacies of FATCA, how it works and how it differs from the OECD's Common Reporting Standard (CRS).

Important

Information on data transfer in the USA

Although the USA is not part of the Common Reporting Standard (CRS), the there are bilateral agreements on data exchange through FATCA (Foreign Account Tax Compliance Act). These agreements only apply to private accounts and are therefore not relevant for US LLCs and business accounts of foreign citizens. US LLCs are considered separate legal entities and not foreign account holders, which is why they are not affected by these regulations.

What is FATCA?

FATCA, or the Foreign Account Tax Compliance Act, is a U.S. law enacted in 2010 to Tax evasion by US citizens with accounts and assets abroad. It requires foreign financial institutions (FFIs) to report information about financial accounts held by US taxpayers to the Internal Revenue Service (IRS).

Objectives of FATCA

The main objective of FATCA is to detect and prevent tax evasion by US citizens and entities through the use of foreign accounts. By increasing transparency and ensuring that US taxpayers disclose their foreign assets, FATCA aims to improve tax compliance and broaden the tax base.

Main components of FATCA

Reporting obligations for foreign financial institutions

Foreign financial institutions must report detailed information about accounts held by US taxpayers to the IRS. This includes:

• Details of the account holder
• Account balances
• Gross receipts and withdrawals

30% Withholding tax

FFIs that do not comply with FATCA reporting requirements are subject to a 301TP3 withholding tax on certain US source payments, such as interest and dividends. This penalty is intended to encourage compliance.

Intergovernmental agreements (IGAs)

The US has entered into intergovernmental agreements (IGAs) with over 100 countries to facilitate the implementation of FATCA. These agreements allow FFIs to report information to their local tax authorities, which then forward it to the IRS.

Reporting obligations for US citizens

US citizens and resident aliens must report their foreign financial assets if they exceed certain thresholds. This reporting is done via the annual tax return and the Foreign Bank Account Report (FBAR).

How does FATCA work?

Registration and notification by FFIs

FFIs must register with the IRS and agree to identify and report information about their US account holders. This includes:

• Identification of US accounts by means of due diligence
• Annual reporting of account information to the IRS or local tax authority as part of an IGA
• Withholding and payment of 301TP3 tax on US-based payments to non-compliant account holders

Compliance obligations for individuals

US taxpayers must disclose their foreign financial assets if the total value exceeds certain thresholds. Failure to comply can result in significant penalties, including fines and potential criminal charges.

Effects of FATCA

Increased compliance costs

FFIs generate considerable Coststo comply with FATCA requirements, including system upgrades, staff training and legal costs.

Improved global tax transparency

FATCA has spurred global efforts to increase tax transparency and inspired other countries to adopt similar measures, such as the Common Reporting Standard (CRS).

FATCA vs. CRS: Important differences

Origin and scope

• FATCAA US-specific law targeting US taxpayers with foreign accounts.
• CRS: A global standard developed by the OECDfor the automatic exchange of financial account information between participating countries.

Participants

• FATCA: Implemented by IGAs with over 100 countries.
• CRSAdopted by over 100 countries, with the exception of the USA.

Reporting obligations

• FATCAFFIs report to the IRS or through local tax authorities as part of an IGA.
• CRSFinancial institutions report to their local tax authorities, which exchange information with other participating countries.

Sanctions

• FATCANon-compliant FFIs are subject to a 301TP3 withholding tax on US-based payments.
• CRSNo specific sanctions; compliance is enforced by the local tax authorities.

FAQs on FATCA

What is the main objective of FATCA?
FATCA aims to prevent tax evasion by US citizens and entities with foreign financial accounts.

How do they differ FATCA and CRS?
FATCA is a US law that affects US citizens, while CRS a global standard which enables the automatic exchange of information between participating countries.

Who must comply with FATCA?
Foreign financial institutions that hold accounts of US taxpayers and US citizens with foreign financial assets must comply with FATCA.

What happens if an FFI does not comply with FATCA?
Non-compliant FFIs are subject to a 301TP3 withholding tax on certain U.S. source payments.

How is the FATCA information reported?
FFIs report the information either directly to the IRS or through their local tax authorities as part of an IGA.

What are the penalties for US citizens who do not comply with FATCA?
U.S. citizens who fail to report their foreign financial assets may be subject to significant fines and potential criminal charges.

Conclusion

FATCA has a significant impact on the international tax landscape and compliance requirements for foreign financial institutions. It serves as a model for other international efforts to increase tax transparency, including the CRS. Whereas FATCA specific to the USA the CRS aims to achieve broader global tax transparency. Both systems play a crucial role in combating tax evasion and promoting global financial integrity.