With the world getting more globalized by the day, individuals and institutions holding money in different parts of the world, the governments are left with the task of tracing revenue and wealth hidden in the offshore areas. To address this challenge, the world's tax authorities came up with two such compliance requirements: FATCA and CRS. Both these systems have transformed the process of financial institutions collecting and reporting information about account holders to make it transparent and prevent tax evasion. We will discuss FATCA and CRS reporting in detail, understand the concept of FATCA declaration, and know the major differences between them in this blog.
What is FATCA?
FATCA refers to Foreign Account Tax Compliance Act. FATCA is a legislation enacted by the U.S. in 2010 and implemented globally as of 2014. FATCA specifically targets U.S. citizens, Green Card holders, and U.S. tax residents holding financial assets overseas but not declared on their United States tax returns.
Foreign financial institutions, including banks, insurance companies, investment entities, and certain trusts, under FATCA are required to report and identify information about U.S. account holders to the United States Internal Revenue Service (IRS). In default, they shall be liable to severe penalties, including being obliged to withhold and remit a withholding tax on certain U.S. source payments of 30% to the financial institution.
In short, FATCA gives the U.S. government full visibility of foreign-held assets of its taxpayers.
What is FATCA Declaration?
A FATCA declaration is a self-certification form filled in by account holders through their bank. In it, the account holder certifies himself or herself as a U.S. person for tax purposes or otherwise. FATCA declaration is collected by banks and financial institutions at the time of opening an account for a new customer or at such time. they keep an account of existing customers.
FATCA declaration. requests. disclosure. of. the. following. information:
- Tax. residency. status
- Green Card or U.S. citizenship status
- U.S. Taxpayer Identification Number (TIN)
- Foreign account information
This self-certification is of utmost significance because it makes the financial institution FATCA reporting compliant. Failure to deliver a correct FATCA declaration may incur a fine.
What is CRS
FATCA is comparable to the Common Reporting Standard (CRS), a global standard developed by the Organization for Economic Co-operation and Development (OECD) in 2014. While CRS is a much more comprehensive program that is used by more than 100 countries worldwide, FATCA is only necessary for the United States and its citizens.
The objective of CRS is simple: to facilitate automatic exchange of financial account information between the tax authorities of participating jurisdictions. What this means is if an individual is a resident Indian and owns a Singapore bank account, the Singapore bank would share account information with Indian tax authorities through the CRS system.
CRS requires banks to obtain information from account holders' tax residency, typically in the form of a CRS declaration or self-certification. The information is filed each year with other countries' tax authorities to prevent tax evasion.
What is CRS Declaration?
Like FATCA, CRS report is an individual or entity's self-certification that is reported to the financial institution. It helps the institution identify the tax residence of the account holder and whether the account needs to be reported under CRS or not.
The reporting process for FATCA and CRS is also consolidated in practice. The bank will not provide the customer with two separate forms where he or she would indicate his or her status under FATCA and CRS. That would be too time-consuming, and compliance on both requirements can be achieved at a single instance.
How FATCA and CRS Reporting Works?
The reporting under FATCA and CRS is founded on mutual collaboration between tax authorities and financial institutions. Let us describe the procedure:
1. Data Collection – The customers complete the FATCA declaration form and CRS declaration form and provide tax residence and identification numbers information.
2. Verification –The financial institutions employ Know Your Customer (KYC) protocols to verify the information by passport, address proof, and tax identification numbers.
3. Reporting –FATCA reporting demands that information about U.S. account holders be sent to the U.S. IRS either directly or indirectly (according to the Inter-Governmental Agreement).
CRS reporting entails reporting information to the local tax authority, who in turn will re-direct to the tax authority of the account holder's country of residence.
4.Penalties and Compliance – Failure to comply with CRS and FATCA reporting will attract both individual and institution penalties. For example, the penal consequence for non-compliance with FATCA will result in penalty of a 30% withholding tax.
Key Differences Between CRS and FATCA
The objective of FATCA and CRS is almost same and that is controlling tax evasion, but in terms of implementation and scope the two are significantly different. The differences are outlined as follows:
1.Origin and Coverage
- FATCA is a U.S. law aimed at U.S. persons worldwide.
- CRS is an OECD initiative, taken worldwide in more than 100 jurisdictions.
2.Reporting Parties
- FATCA reporting targets U.S. citizens, tax residents, and U.S.-owned entities.
- CRS reporting targets residents of all countries taking part.
3.Authority of Reporting
- FATCA reporting reports to the U.S. IRS directly or indirectly via local tax authorities.
- CRS reporting is delegated to the domestic tax authority, who makes it accessible to other jurisdictions.
4.Penalties
- FATCA has tough monetary penalties, e.g., the 30% withholding on U.S.-source payments.
- CRS has none but requests jurisdictions to pass their own compliance legislation.
5.Scope of Data
- FATCA reports only U.S. citizens.
- CRS has a much wider scope as it involves reporting on all the account holder who are tax residents in affected jurisdictions.
Why FATCA and CRS Matter to You?
For individuals:
When you invest in financial products, open an account with a bank, or even purchase insurance abroad, you're likely to be asked to submit a FATCA and CRS declaration. It's not a meaningless exercise—it ensures your information is correctly reported to tax authorities and prevents you from facing legal troubles later.
For institutions that are financial:
investment institutions and banks will have a responsibility to adhere strictly to the FATCA and CRS rules. Non-adherence will result in massive fines, loss of reputation, and lawsuits. Institutions will thus have a responsibility to put in place robust due diligence, reporting, and record-keeping systems.
For governments
FATCA and CRS reporting make the global fight against tax evasion more effective. With the transparency of the country, countries will be able to protect their tax base and be equitable in their tax system.
FATCA vs CRS: Real-World Consequences
Let say an Indian citizen who is a resident as per Income Tax has an account in Swiss Bank. In this case the Swiss bank will report the account to the Swiss tax authority in accordance with CRS, and the Swiss tax authority will report it to the Indian tax authority. Similarly, if the account owner is American, the very same Swiss bank will report to the U.S. IRS in accordance with FATCA regulations.
This cross-reporting discourages Indian and US taxpayers to hide foreign assets. This way, the FATCA CRS regimes offset each other to plug loopholes and enhance worldwide financial openness.
Conclusion
The taxation space has seen a massive transformation after implementation of FATCA and CRS reporting. The systems make it infeasible for tax payers to circumvent their liability by taking money across borders. FATCA reporting declaration procedures and CRS reporting declaration procedures, though sometimes referred to as wastage of time, are the very cog mechanisms within the hands of governments and banks in order to impose compliance and transparency.
Whereas FATCA only addresses the U.S. taxpayers, CRS has created a global network of reporting of information by more than 100 jurisdictions.
For institutions and individuals alike, it is no longer optional but compulsory to know the needs of foreign compliance tax act (FCTA) and CRS. Being FATCA and CRS compliant does not only keep the law in compliance but also results in equitable and transparent financial systems across the globe.