Will FATCA Now Align With CRS In The Wake of The Paradise Papers Scandal?
Two major leaks to the media of data concerning use of tax havens by companies and individuals have happened in the last couple of years. First, in 2015 the Panama Papers, consisting of 11.5 million documents from Panamanian law firm and corporate service provider Mossack Fonseca that detail financial and attorney-client information for more than 214,000 offshore entities. A consortium of journalists from 107 media organizations in 80 countries published the data and revealed the identities of tax avoiders.
Second, in November 2017, 13.4 million confidential documents dubbed the Paradise Papers were also published by a global consortium of more than 380 journalists. These related to offshore investments by more than 120,000 people and companies across more than some 20 tax jurisdictions, channelled largely through the offshore law firm Appleby, and the corporate services providers Estera and Asiaciti Trust.
The revelations provoked global outrage. The list of clients listed in the Paradise Papers in particular is said to be dominated US companies and individuals, including politicians, Fortune 500 companies, financial institutions and high-net worth individuals. Under US tax laws, records of offshore accounts and investments by individuals, entities and trusts must be kept and reported under the Foreign Account Tax Compliance Act (FATCA). Likewise, foreign financial institutions (FFIs) have reporting requirements under the Common Reporting Standard (CRS) of the Organization for Economic Co-operation and Development (OECD).
Both FATCA and CRS aim to reduce and eliminate tax evasion. However, while the two are both cross-border in scope they are not aligned. Some 100 tax jurisdictions have signed up to adopting the CRS, which is the global standard for automatic exchange of tax information. In the EU, the CRS is implemented via the Directive on Administrative Cooperation (DAC), which is closely aligned to the CRS. The basic structure of the CRS is similar to that of FATCA, but there are greater differences than with the DAC and these could catch out the unwary.
Note that FATCA requires a financial institution to find US persons, while the broader scope of the CRS means the definition of a “reporting financial institution” is different. This means that even if you are not required to report financial accounts under FATCA, you could still be obliged to under CRS, which has no minimum limit. FATCA, however, only applies when an individual account contains at least $50,000 (with companies varying minimum limits apply). Thus there are major differences in scale. The number of US persons obliged to report under FATCA is just a few thousand, whereas in a CRS jurisdiction, the number of reporting accounts can be tens of millions. If you are FATCA-compliant, don’t assume it means you are also compliant with CRS, which is more wide-reaching.
Even last year, the IRS was saying it had no plans to align FATCA with the new CRS, which aims to fight global tax evasion and tax avoidance and improve tax transparency. We are likely to see huge changes in tax reporting as the CRS becomes ever more widely adopted – cross-country consistency and in-country certainty to name just two. The Panama and Paradise Papers both revealed tax avoidance on an industrial scale globally, so the pressure is now on the IRS to step up and review its FATCA reporting standards. This is one to watch.