Financial Institutions Face Unique Compliance Risks
The actions of financial institutions are subject to complex tax rules, and remaining in compliance can be challenging. Even seasoned tax professionals may run up against a lack of resources that hampers their efforts. The Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) are two regulations of particular interest to financial institutions.
What Is FATCA?
FATCA is a US government regulation designed to identify US citizens who may be evading taxes by hiding assets within foreign financial institutions or through the ownership of foreign entities. The Internal Revenue Service requires foreign financial institutions (FFIs) to report on accounts held by US persons to ensure taxes are being paid in accordance with the law.
Many nations have entered into intergovernmental agreements (IGAs) with the United States in order to streamline the implementation of FATCA in their countries.
In practice, FATCA has implications for more than just foreign financial institutions (FFIs): US financial institutions must also comply with FATCA regarding payments made to foreign entities.
FATCA Compliance Challenges
FATCA compliance may seem straightforward, but putting the law into effect has presented significant challenges for many financial institutions.
The first step to ensuring FATCA compliance is identifying account holders subject to its regulations. Financial institutions often try manual outreach, asking clients to fill out and return tax documents. The complexity of the forms, confusion about FATCA, and the initiative required to fill out and return the documents results in many people ignoring them.
Furthermore, the status of account holders may change over time. Monitoring clients for FATCA eligibility over time can be onerous.
If a US or foreign financial institution cannot determine the FATCA status of an account holder or that person fails to comply, the institution may be required to withhold, as a tax payment, 30 percent of any funds delivered to the payee.
Foreign financial institutions that fail to register with the IRS and comply with FATCA requirements may be subject to a 30 percent withholding on any payments made to them through accounts in the United States.
Financial institutions found to be guilty of helping Americans evade taxes face substantial fines.
What Is CRS?
The Common Reporting Standard was created by the Organization for Economic Cooperation and Development (OECD). Implementation of the CRS is intended to combat tax evasion on a global scale, and dozens of nations have signed on. It provides financial institutions with guidance on reporting and due diligence in regard to their depositors’ assets.
CRS Compliance Challenges
Much of the burden of implementing the CRS falls on financial institutions, which are tasked with reporting and performing due diligence on their accounts. Identifying accounts subject to CRS reporting can be a time-intensive task. While the CRS was inspired by FATCA, its rules are not identical, and this can make compliance even more challenging.
As of 2017, the OECD has yet to outline any penalties for financial institutions that fail to comply with the CRS. However, penalties from other international tax agreements could still apply.
How Financial Institutions Can Manage FATCA & CRS Compliance
Many financial institutions spend a significant amount of time trying to identify accounts subject to FATCA or CRS, or both. Manual review and outreach is usually not a practical option.
A variety of software applications can assist with account classification, quickly identifying which clients are subject to reporting requirements. Such an approach can greatly reduce the workload on financial professionals by removing accounts that do not require further outreach.
Our D&B Compliance FATCA & CRS Classifier is a solution to help solve those needs. Accounts are sorted based upon business information in the Dun & Bradstreet database. Existing accounts can be reviewed for classification, and new clients can be screened during the onboarding process.
Both FATCA and CRS regulations add an additional layer to the work that must be done by financial institutions. Understanding their implications and how to more efficiently manage your obligations can save time and money.