Understanding FATCA and CRS Compliance in Offshore Banking

Introduction – FATCA and CRS Compliance

The need for strategies to combat tax evasion and money laundering contributed to the creation of FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard).

FATCA was introduced in 2010 by the United States Tax Department with guidelines to enforce tax compliance and fight tax evasion CRS serves as a more international counterpart to FATCA. While FATCA exclusively applies to U.S. persons, CRS is relevant to citizens of any registered country. The differences can be seen below :

FATCACRS
Requires assistance from financial institutions to identify US personsCRS has 90 countries (except the US) committed to it – so has a wider scope
Not mandatory to report on financial accounts in all casesReporting financial accounts is obligatory under CRS
An account should have a balance of over $50,000 There is no de minimis limit under the CRS
The number of US accounts reported under FATCA is in the thousandsSeveral million accounts are reported under CRS

FATCA

Implemented to combat tax evasion and ensure strict compliance with tax rules, FATCA’s main objective is to identify and prevent offshore tax evasion by US citizens or residents. Under FATCA, financial institutions may withhold tax if US persons fail to meet documentation requirements by reporting such cases to the US tax department. This has a direct impact on US multinationals and foreign financial institutions.

Key features of FATCA include: 

a) Reporting Requirements: FFIs must identify and report specified information about US account holders, including their identities, account balances, and income generated from the accounts. 

b) Withholding Provisions: If an FFI fails to comply with FATCA requirements, it may be subject to a 30% withholding tax on certain US source payments.

FATCA is primarily aimed at FFIs around the world and establishes a bilateral information exchange framework between the US and participating jurisdictions. Many countries have entered into intergovernmental agreements (IGAs) with the United States to facilitate the implementation of FATCA. These IGAs provide a framework for the exchange of information between the US and the tax authorities of the partner jurisdiction.

FATCA: US – India Agreement 

The global impact of FATCA has encouraged foreign financial institutions to strengthen their tax reporting processes, gaining visibility in foreign countries and investor confidence. 

In 2014, the Indian government introduced Rules 114F – 114H and Form 61B in the Income Tax Act to accommodate FATCA. In addition, in 2015, an intergovernmental agreement (IGA) was signed with the US. This agreement mandates Indian tax officials to collect specific account information from US investors, ensuring tax compliance by US citizens and increasing transparency for the Internal Revenue Service (IRS).

NRIs FATCA Declaration 

Since January 2016, all Indian and NRI investors must file a FATCA self-declaration, providing standard information such as name, PAN, address, etc. The declaration, covered under rules 114F-114H, ensures that tax authorities have access to relevant information, and any changes must be reported to the financial institution within 30 days.

CRS

Developed by the Organisation for Economic Cooperation and Development (OECD), CRS mandates financial institutions globally to provide information about their citizens, and their offshore assets to respective tax authorities. Over 90 countries, including India, have adopted this global standard.

CRS Declaration

Similar to FATCA, CRS requires self-declaration with details from taxpayers. This declaration is an extension of KYC documents and can be submitted online or offline at fund house branches.

Key features of CRS include: 

a) Reporting Requirements: Financial institutions in participating jurisdictions are required to identify and report information on financial accounts held by non-residents, including individuals and entities, to their local tax authorities. This information is then automatically exchanged with the tax authorities of the account holders’ respective jurisdictions. 

b) Scope: CRS has a broader scope compared to FATCA, as it covers not only individual taxpayers but also corporations, trusts, and foundations.

What are the documents required for FATCA & CRS declarations?

Foreign financial institutions in India, for example, mandate U.S. persons to submit documents such as 

  • PAN card
  • Passport
  • Government-issued IDs like Voters ID or Aadhaar. 

The government identifies investors as residents or NRIs based on this information.

Bottom line

FATCA and CRS are two frameworks addressing tax transparency. While FATCA focuses primarily on US account holders, CRS has a broader scope, encompassing the exchange of financial information for non-resident account holders across participating jurisdictions.

FATCA and CRS have had a huge impact on global financial transparency and financial institutions are now required to collect and report information on account holders to their respective tax authorities. It has reduced the scope of banking secrecy and has greatly helped in the fight against tax evasion.

Check our article: “The Impact of FATCA and CRS on Offshore Company Banking” for more insights on this topic.

If you want to know more about the options available for you in different offshore jurisdictions under CRS, 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.

Author

Sharon Hughes

Entrepreneur Leadership Network Contributor
Sharron is a business development consultant specialised in growth and M&A. Sharron Hughes is an expert in providing up to date insights and advices to startups and SME.

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