Company Banking

The Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) were created to fight tax evasion and promote transparency in offshore financial transactions. 

FATCA 

FATCA is a United States federal law enacted in 2010 with the primary objective of preventing tax evasion by US citizens and residents through offshore accounts. Under FATCA, foreign financial institutions (FFIs) are required to report information about the financial accounts held by US taxpayers to the Internal Revenue Service (IRS). FFIs that do not comply with these reporting requirements face steep penalties, including a 30% withholding tax on certain U.S. source payments.

CRS 

CRS was developed by the Organisation for Economic Co-operation and Development (OECD). Introduced in 2014, it aims to establish a global framework for the automatic exchange of financial information between tax authorities. CRS requires financial institutions in participating countries to collect and report information on foreign account holders to their respective tax authorities. This information is then exchanged with the tax authorities of other participating jurisdictions. CRS is an international version of FATCA, since FATCA is only for US persons, while CRS is applicable for citizens of every registered country.

Differences between FATCA and CRS

In order to understand the inner workings and the impact of these structures, it is important to examine the differences between these two. Although both FATCA and CRS share a common objective of combating tax evasion, they significantly differ in scope, reporting requirements and the entities targeted.

Scope of application

FATCA concerns US citizens and residents with offshore accounts. It imposes a heavy burden on FFIs to identify and report on US account holders. CRS aims to create a global standard for automatic exchange of financial information. It applies to a wider range of account holders, including residents of participating countries, non-residents and entities such as offshore companies.

Reporting requirements

In terms of reporting obligations, FATCA imposes an obligation on foreign financial institutions (FFIs) to report detailed information about US account holders to the Internal Revenue Service (IRS). This includes names, addresses, account balances and various sources of income, with the aim of preventing tax evasion by US citizens and residents using offshore accounts.

CRS requires participating financial institutions to report a wider range of information. This includes not only account holders’ names, addresses and account balances, but also details such as dates of birth, tax identification numbers and various types of income. This difference is due to the CRS aim to promote global financial transparency by sharing this data between the tax authorities of countries that fall under its influence. 

Main Focus

FATCA focuses primarily on individuals. Although it covers certain entities, such as foreign trusts and investment entities, the reporting requirements for these entities are less extensive than those for individuals.

CRS, by contrast, takes a broad approach, covering both individual and entity accounts. This means that offshore companies, trusts and other legal entities are subject to reporting under the CRS, making it much broader in scope.

Global Reach

FATCA is applied only by the United States, although it has bilateral agreements with many countries to facilitate compliance. CRS has an international framework with over 100 jurisdictions participating, including major financial centres. This global coverage makes the CRS a more comprehensive and far-reaching initiative.

Impact on Offshore Company Banking

We will now consider offshore company banking and the intricate considerations that businesses and investors must weigh in light of FATCA and CRS:

What are the Compliance Costs?

FATCA imposes substantial compliance costs. This is due to the fact that foreign financial institutions (FFIs) must invest significantly in infrastructure and staff to identify, report and monitor US account holders. These expenses are often passed on to customers through higher fees.

CRS spreads compliance costs more evenly among participating countries. While FFIs still need to invest in compliance measures, the collaborative nature of the CRS may result in lower, overall costs for offshore banks and their clients compared to the more one-sided burden imposed by FATCA.

Which one offers a Higher Privacy Level?

Generally, FATCA offers a lower level of privacy compared to CRS. Under FATCA, US account holders’ financial information is shared with the Internal Revenue Service (IRS), potentially compromising their privacy. In contrast, CRS involves the automatic exchange of financial data among participating countries’ tax authorities, impacting the privacy of account holders from multiple nations. However, because CRS is a more comprehensive and global initiative, it may lead to a perception of reduced privacy for a broader range of individuals and entities compared to FATCA’s more targeted focus on U.S. account holders.

Entity Account Reporting difference

When it comes to FATCA, reporting on entities like offshore companies is less stringent compared to CRS, which primarily focuses on individual accounts. With CRS, offshore companies and other legal entities face more extensive reporting requirements, posing a challenge for companies to maintain anonymity and confidentiality.

Global Banking Relationships

FATCA implementation has compelled certain foreign banks to restrict or sever their relationships with US clients to avoid compliance. Consequently, this has resulted in a reduction in banking options for both US individuals and entities. CRS, on the other hand, has prompted many offshore banks to adopt more standardized compliance practices, potentially expanding banking options for clients.

Bottom Line

In conclusion, FATCA and CRS represent significant shifts in the landscape of offshore company banking, aiming to promote transparency and combat tax evasion. While both initiatives share similar goals, they differ in scope, reporting requirements, and global reach.

FATCA primarily targets US citizens and residents with offshore accounts, placing a substantial burden on FFIs to identify and report these account holders. In contrast, CRS is an international framework that applies to a broader range of account holders, including individuals and entities, making it more comprehensive in scope.

The impact on offshore company banking is multifaceted. Companies seeking offshore financial services must consider compliance costs, client privacy, entity account reporting, and global banking relationships. These factors can influence the choice of jurisdiction and offshore banking partners.

Ultimately, understanding the differences between FATCA and CRS is crucial for businesses and individuals engaged in offshore company banking. Staying informed about regulatory changes and seeking professional advice is essential to navigate this evolving landscape while ensuring compliance with tax laws and regulations.

If you wish to learn more about the impact of FATCA and CRS on your financial status, do not hesitate to book a free consultation with our team now.

Disclaimer

Widelia and its affiliates do not provide tax, investment, legal or accounting advice.  Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, investment, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Please consult https://widelia.com/disclaimer/ for more information.