FATCA & CRS Compliance 2017 Update
Thinking about launching an an offshore fund? Are you up to speed on FATCA & CRS compliance, best practices and deadlines?
The Foreign Account Tax Compliance Act (“FATCA”) has had a far-reaching impact on the investment funds industry. Investment funds are required to analyze existing investor accounts, validate and update investor information, enhance on-boarding processes and expand reporting capabilities. US FATCA requires non-US investment funds to report detailed information about their US investors.
The OECD’s (“Organisation for Economic Co-operation and Development”) Common Reporting Standard (“CRS”) for the Automatic Exchange of Financial Information in Tax Matters (“CRS”) introduces a similar regulatory framework to be adhered to by financial institutions in participating jurisdictions, requiring analysis and reporting on a more global basis. CRS requires investment funds in a CRS participating country to report detailed information about any investor tax resident in another CRS participating country.
FATCA and CRS are international automatic exchange of financial account information mechanisms aimed at addressing perceived tax abuse by a country’s tax payers through the use of foreign accounts and related structures. The purpose of such reporting is to deter tax evasion by persons tax resident in participating countries who might hold investments in such foreign funds.
The US is supportive of CRS, but will not be a participating jurisdiction, at least in the short run. This is generally due to the fact that participation would require an Act of Congress and significant changes in the way that financial institutions document accounts and report information.
SIMILARITIES & DIFFERENCES:
Both regimes are based on the identification and documentation of account holders and the sharing of certain relevant information. However, the classifications under CRS are slightly different, with a lot of the exceptions and de minimis exclusions found under FATCA not available under CRS. CRS is focused on tax residency, as opposed to identifying specified US persons, and reporting on investors in any of the Participating Countries. Finally, CRS does not have a withholding tax associated with it, but will be using a peer review and audits as a way of enforcing.
HOW ARE FUNDS AFFECTED?
U.S. domiciled investment funds:
FATCA: Compliance requires that the appropriate IRS form W-8 is received for each foreign investor. If the investor is a a foreign financial institution (FFI), then the GIIN is collected. If non-US investors exist based on completed forms, verification of US/UK Indicia through a due diligence process (direct and indirect).
CRS: The US is not a CRS participating jurisdiction therefore CRS does not apply to US domiciled funds at this time.
Non U.S. domiciled investment funds:
FATCA: Compliance generally means registering with the IRS (GIIN), establishing the entity in the country of domicile’s tax reporting portal, receiving the appropriate IRS form W-8, performing required due diligence on investors to verify if US/UK Indicia exists, and annual reporting of investor information to the appropriate authority (if reportable due to U.S. indicia).
CRS: Compliance generally means establishing the entity in the country of domicile’s tax reporting portal, receiving the appropriate self certification form from each investor, performing required due diligence on investors to verify country of taxation, and annual reporting of investor information to the appropriate authority if reportable to any of the participating countries. In addition, the manager shall establish written policies and procedures on how they intend to comply with CRS. These policies and procedures are to cover delegation to third parties (if applicable) and should cover: what functions have been delegated; the management/oversight of the delegation; and the performance of any CRS obligations that have not been delegated.
WHAT IS A REPORTABLE PERSON?
FATCA: US persons and substantial US owners of passive NFFEs (or US controlling persons of passive NFFEs under an IGA). These exclude certain US publicly traded entities, financial institutions, nonprofits and other similar entities.
CRS: Any individual identified by a reporting entity within a participating country who is a resident (for tax purposes) in a participating country; as well certain entities (‘passive non-financial entities (NFEs)’) having individual controlling (reportable) persons within another participating country. Click here to see a list of participating countries for 2017 and 2018.
WHAT IS REPORTED?
FATCA: Name | Address |Taxpayer ID # |Account # | Year-End Account Balance (or account closure) |Interest | Dividends | Other Income | Gross Proceeds. If reporting an account held by a passive NFFE with a substantial US owner: Name |Address | Taxpayer Identification Number (TIN) | of the substantial US owner is also required.
CRS: Name | Address | Taxpayer Identification Number (TIN) | Date/Place of Birth | Account # | Year-End Account Balance (or account closure) |Interest | Dividends | Other Income | Gross Proceeds.
PENALTY FOR NON-COMPLIANCE:
FATCA: A 30% withholding tax applies under FATCA on ‘withholdable payments’ (interest and dividends or gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the US) in respect of financial institutions that do not comply with the FATCA requirements and/or customers who do not provide the requisite FATCA documentation.