Why CRS is much more than global FATCA

US FATCA repeal attempt At the end of March 2015, the US Senate attempted to submit an amendment to repeal the Foreign Account Tax Compliance Act (FATCA). Not surprisingly the amendment didn’t make it to a vote. A potential end to global tax evasion? Cracking down on tax avoidance and tax evasion is an important …

by | April 14, 2015 | AutoRek

US FATCA repeal attempt

At the end of March 2015, the US Senate attempted to submit an amendment to repeal the Foreign Account Tax Compliance Act (FATCA). Not surprisingly the amendment didn’t make it to a vote.

A potential end to global tax evasion?

Cracking down on tax avoidance and tax evasion is an important issue not just in the US but now globally, given the advent of the Common Reporting Standard (CRS).

FATCA itself has resulted in over 75,000 banks and financial institutions in over 75 countries agreeing to share tax information with the US.

Couple this with the UK and 50 other countries having signed up to CRS as at the end of October 2014, then the appetite for tax transparency and the sharing of tax information cross border is clearly apparent. Indeed the endorsement by the G20 of this global standard of automatic exchange of information (AEoI) demonstrates just how major an issue tax evasion has become.

CRS is undoubtedly a game changer

CRS was developed by the Organisation for Economic Cooperation and Development (OECD). Although modelled on FATCA, its scope is much more far reaching and vastly increases the reporting requirements ‘foisted’ upon a financial institution.

Complexity arises in the cross border identification, classification and reporting of account holders. Not only does a financial institution need to be able to identify the tax residence of each and every one of its account holders, it has to have the ability to report the necessary information to the relevant tax authority.

Scale of the CRS Challenge

A large number of financial institutions believe that their FATCA compliance efforts will not be completed within budget. There is no doubt that CRS has now significantly increased the scope and complexity of existing projects.

Many firms will have made it through the first year of FATCA on a tactical based solution.  Such solutions are unlikely to be sustainable even when considering the ongoing requirements of FATCA. Looking at this challenge through the lens of CRS, it is clear that firms need to consider now what is required to deliver a robust, strategic solution to AEoI in order to meet the increased compliance workload on an ongoing basis. 

CRS timeline

The 51 ‘early adopting’ countries have pledged to work towards launching their first information exchanges by September 2017, with others expected to follow in 2018. What this means for early adopters is that by the end of 2015 due diligence procedures must be in place, the first reporting period will be the year to 31 December 2016, and reporting must be made to local tax authorities ahead of the September 2017 deadline.

And it doesn’t stop there

The Revised EU Savings Directive (EUSD) is likely to take effect from 2017. The existing directive requires tax payers to identify their country of residence and declare they are compliant with their tax filings, otherwise they will suffer local withholding tax.

The EUSD has followed its own agenda and this somewhat duplication of effort increases the burden already ‘bestowed’ by CRS and FATCA. In addition, the EU has proposed expanding the scope of the Directive on Administration Cooperation (DAC). 

Classification of account holders differs across CRS, FATCA, EUSD and DAC, with differing reportable income. However, the EUSD may well decide to align with CRS, but this remains to be seen.

What will success look like?

CRS has arrived at a time when financial institutions already face a range of significant economic and regulatory challenges, testing many financial institutions capability and capacity to deliver.

From a government perspective, CRS success equates to more tax revenue being collected, but this is dependent on sufficient data being obtained from financial institutions around the world. Not only that, but local tax authorities will need to be able to receive and analyse a vast amount of data.

In order to avoid penalties, financial institutions must have robust, automated control regimes in place to meet global requirements. There is no doubt that regulatory scrutiny is increasing, and so no firm wants to tarnish their reputation by not being able to demonstrate compliance.
 

By Gillian Boston, Associate Director, Business Consulting, AutoRek

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