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How to Meet Newly Clarified FATCA and CRS Foreign TINS Compliance

FATCA requirements for foreign tax identification numbers (TINS) have recently been clarified, with additional time provided, spelling good news for financial institutions (FIs). However, even with the extra time to collect foreign TINS, FIs would be wise to begin the process now to collect and validate numbers to ensure a smooth transition rather than a last-minute scramble. While only a piece of Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) compliance, obtaining foreign TINs is challenging and time-consuming. FIs need to have a process in place and technology to support it in order to compile, validate and maintain the data necessary for FATCA and CRS.

The requirements for foreign TINS were clarified in September with Internal Revenue Service (IRS) Notice 2017-46.  With respect to foreign financial institutions (FFIs), the notice provides that FFIs in Model 1 IGA jurisdictions will not be in “significant non-compliance” with their applicable IGA during 2017, 2018, and 2019, solely because of a failure to report U.S. TINs for preexisting accounts, as long as the FFIs report the account holder’s date of birth, make annual requests for the TINs, and search electronic records for missing US TINs before reporting information on 2017.

For US financial institutions, the notice also delays the start date of the requirement to collect foreign TINs for account holders until January 1, 2018; provides a phase-in period for obtaining foreign TINs from account holders documented prior to January 1, 2018;  and narrows the circumstances in which a foreign TIN is required.

The rules and process are more clear and simple for US TINS.  FIs may be familiar with the use of the IRS US TIN validation service. US account holders are used to providing these as a matter of course. However, for foreign TINS, there is little transparency, and no clear or universal guidelines or standards, making the collection of foreign TINS problematic. Outside of the US, each country has its own domestic rules governing the issuance, structure, and use of TINS or a functional equivalent. Some countries have them, some don’t, and some only issue to certain groups. In addition, formatting varies significantly.

For FATCA pre-existing accounts, a TIN must be reported if the reporting FI already has the TIN in its records or is required to obtain it under domestic law. Otherwise, a TIN is not required to be reported if the reporting Financial Institution does not hold the TIN in its records and is not otherwise required to obtain the TIN under domestic law. However, reporting financial institutions are required to use reasonable efforts to obtain the TIN, according to the IRS.

To complicate matters, in addition to FATCA, the Common Reporting Standards (CRS) directive requires Financial Institutions to report the TIN of each reportable person that is an account holder. If an entity account holder is identified as having one or more controlling persons that is a reportable person, the TIN of the entity, and the TIN of each reportable person, is required. A TIN is not required to be reported if a TIN is not issued by the reportable jurisdiction or the domestic law of the relevant reportable jurisdiction.

Comparing CRS and US Foreign TIN Requirements

Although both US withholding regulations and CRS require TINs, each regime differs on how they can be collected and the consequences of not having foreign TINS.

Why collecting TINS is difficult

Because each jurisdiction has its own guidance regarding their local TINs, it can be challenging and time-consuming to determine the TIN rules for each jurisdiction around the world. 

In an effort to alleviate that challenge, the Organization of Economic Cooperation and Development (OECD) provided a webpage where each CRS-particpating country can provide guidance on their local TINs. The webpage is useful, but it does not always provide the information FIs need. For instance, some countries provide guidance on individual account holders, but not entities. OECD guidance, while helpful, may not provide all the information needed to confirm if a TIN exists for a jurisdiction in all circumstances.

Other TINS issues FIs often grapple with include:

  • Difficulty in interpreting OECD guidance and programming it into account holder master files.
  • The fact that different formats/values are required by jurisdiction.
  • Difficulty in validating or identifying the jurisdiction of TIN without a detailed self-certification.
  • The need to update investor/account master files to accept multiple TINs and identify the jurisdiction for each TIN.

To validate a TIN, an FI can use regional and national websites for guidelines on TIN formatting.  Some even provide a TIN check module for the purpose of further verifying the accuracy of the TIN. They can also interpret guidance from the OECD website to assist in determining the format and existence of TINS from jurisdictions.

For CRS Pre-existing accounts, the FI must use reasonable efforts to obtain a TIN by the end of the second year following the year the account is identified as reportable. Where the account holder or controlling person's jurisdiction becomes a reportable jurisdiction after remediation or account opening, the Reporting FI has until the end of the second year following the year in which the jurisdiction becomes reportable.

Reasonable efforts means "genuine attempts to acquire the TIN from a pre-existing account holder" and should be made at least during the period from when the account is identified as reportable and the end of the second year calendar year following that year. Reasonable efforts do not "necessarily" require closure, blocking or transferring the account nor conditioning or otherwise limiting its use.

Use of Third-Party Data to Collect and Validate Entitiy TINS

Another way to mitigate the cost and time investment required to obtain and validate foreign TINS for pre-existing, as well as new account holders, is by using third-party data. Third-party data can aid the process by enabling FIs to collect the information without reaching out to account holders, a process that can be lengthy, unproductive and not always a positive experience for account holders.

Third-party data sources can provide both identification and verification of entitiy TINS for FIs:

  • TIN identification: Customer provides name and address, and the third party provides a TIN associated with that entity if the third party has the TIN;
  • TIN verification: Customer provides name, address (optional) and TIN, and the third party provides the registration information for that record to allow the customer to compare what is on customer file with the registration information.

Using third-party data can provide appropriate tools to onboarding professionals to allow them to be efficient and effective.

The OECD and the IRS may not necessarily require a reporting Financial Institution to confirm the format and other specifications of a TIN. However, FIs are advised to do so in order to enhance the quality of the information collected and minimize the administrative burden associated with reporting an incorrect TIN.

Despite the longer timeframe to collect this information, FIs would be wise to get a headstart to meet the IRS requirement for foreign tax identification numbers (TINS) for accounts outside the US. While the manual process for collecting these foreign TINS can be difficult and time-consuming, FIs can employ effective processes and strategies to compile and maintain the necessary data—including the use of third-party data—to ease the burden. It will pay off for FIs in the long run.

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