Frequently asked questions on CRS and FATCA
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) instructs the US Treasury to collect information on offshore accounts held by US Citizens. US companies send W-2 or 1099 forms to individuals and the IRS to notify them of income earned and the IRS then expects individuals to declare this income on their annual tax forms. In a similar fashion, Foreign Financial Institutions file FATCA reports to notify the IRS of US Citizens’ offshore income and accounts and should match a US filer’s form 8938 declaration of offshore assets.
What is CRS?
The Common Reporting Standard (CRS) is an agreement of over 100 countries to exchange information of financial holdings held by a citizen of another CRS member country. CRS reporting happens annually under local law, and is coordinated by the OECD, with the final exchange deadline of September 30th of that year.
When is CRS and FATCA reporting due?
For US FATCA IGA Model 2 and non-IGA countries, FATCA filings are due March 31st. For US FATCA IGA Model 1 countries, the local tax authority is expected to file returns by September 30th. Likewise, local tax authorities are expected to exchange tax information by September 30th of the year. Note that Financial Institutions in Model 1 IGA countries and CRS filings are mandated by local law, which often has its own filing deadlines. See www.TransWorldCompliance.com for a complete list of local filing deadlines.
*Note: due to the Covid-19 pandemic, some deadlines have changed for the year 2020, click here for more information.
What is a US Person?
According to what is stated in the W-9 form of the IRS, for federal tax purposes, you are considered a U.S. person if you are:
An individual who is a U.S. citizen or U.S. resident alien;
A partnership, corporation, company, or association created or organized in the United States or under the laws of the United States;
An estate (other than a foreign estate); or
A domestic trust (as defined in Regulations section 301.7701-7).
What is a financial self-certification?
The US uses forms W8 and W9 to have individuals declare that they either are or are not a US Person and therefore subject to US taxes. The US uses the W8-BEN-E form for entities to declare any US Substantial Owners that would be subject to US taxes. Under CRS, there is not specific form, but tax residency must be declared for individual owners of financial accounts and Controlling Persons of certain types of entities.
What is Financial Institution under CRS and FATCA?
Under FATCA and CRS, a Financial Institution (for FATCA they call them Foreign Financial Institutions) must report financial accounts held by foreigners. A Financial Institution is a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company. This is a deceptively concise list that does not include all the exceptions and nuances.
What is the difference between CRS and FATCA reporting?
The United States, subject to reciprocal tax agreements, taxes all US Persons worldwide regardless of residence. Other countries tax based on Tax Residency, regardless of nationality. Under FATCA, if you are a US Person with an offshore account, the Financial Institution will report your holdings to the IRS annually. Under CRS, if you are a tax resident of a CRS member country with a financial account in another CRS member country, the account will be reported annually back to your tax residency.
What is a FATCA IGA?
FATCA requires all Financial Institutions worldwide to register and report US Persons with offshore financial accounts or face a 30% automatic withholding on any FDAP (Fixed, Determinable, Annual, Periodical) income derived from the US. Since most Financial Institutions had no choice but to agree, a number of governments got involved and created Inter Governmental Agreements (IGA) with the US to pass local law which mandates the collection and exchange the IRS requested data.
How does a FATCA IGA Model 1 differ from a FATCA IGA Model 2?
In a FATCA IGA Model 1 country, Financial Institutions report to the local tax authorities, who forward the information to the IRS systems. Any questions are channeled through the local tax authority. In an IGA Model 2 country, Financial Institutions deal directly with the IRS to do reporting and to respond to queries.
How are FATCA Reports filed to the IRS?
FATCA Reports are filed in XML format. The XML files need to be signed, encrypted, and packaged. The package is delivered through a SFTP server to the IRS. The IDES system examines the delivered data for security and if it passes, sends it to the ICMM system for processing. The ICMM system generates a results XML package and the process is reversed.
How are CRS Reports filed?
Since CRS Reports are filed to the local tax authority, each country has its own specific requirements and formats to deliver data to the tax authority. Once delivered, participating tax authorities exchange data via an OECD sponsored system called the Common Transmission System.
What is the difference between and Active and Passive Non-Financial Entity?
A Passive NFE (CRS) or Passive NFFE (US FATCA) hold at least 50% of investment assets or derives at least 50% of income from investment assets. An Active NFE (CRS) or Active NFFE (US FATCA) should have less than 50% in investment assets or investment income.
What is the definition of a FATCA Substantial Owner?
A US Person that owns at least 25% of the Passive NFFE must be reported to the US as a FATCA Substantial Owner. Owners with less than a 25% ownership do not need to be reported.
Why do CRS/FATCA records get rejected?
Even when the XML is created correctly and with all required fields, it is possible to get records rejected for missing Tax ID numbers or incorrectly formatted Tax ID numbers. This is not surprising since most Financial Institutions only began collecting Tax ID numbers from foreign individuals and entities after CRS and FATCA begin requiring reporting.
Who is required to report under CRS and FATCA?
Foreign Financial Institutions are required to report under FATCA and CRS. A Foreign Financial Institution is a Custodial, Depository, Investment and certain types of Insurance companies. For FATCA, US Citizens are required to fill out a Form 8938 and FBAR form to declare offshore assets.
How does CRS and FATCA affect individuals?
Both US FATCA and the OECD’s equivalent, Common Reporting Standard (CRS), are government attempts to identify taxpayers that are trying to avoid paying taxes owed by storing money in offshore Financial Institutions. This practice of stashing money in offshore accounts without paying taxes is, and always has been, illegal but was very difficult to identify. FATCA and CRS compels Financial Institutions to report financial accounts held by foreigners to their respective tax jurisdictions, making it much harder to get away with this practice.
What is tax avoidance vs. tax fraud?
Tax avoidance takes advantage of legal loopholes in tax laws to avoid or minimize tax payments by individuals or companies. Tax fraud is breaking laws to avoid paying taxes owed. There are several world-wide initiatives to reduce lost taxes through tax avoidance and tax fraud.
What information does CRS and FATCA report to the local authorities?
Account Holder identifying information, and in the case of an entity, the substantial owners or controlling persons identifying information along with the corresponding Account identifying information, the Dec 31st account balance, total interest paid, total dividends paid, and total withdrawals during the fiscal year.