The United States is not the only country interested in pursuing foreign tax compliance involving overseas bank accounts, financial accounts, and other income generating assets.
Although FATCA (Foreign Account Tax Compliance Act) is a U.S. Law, and the United States has entered into FATCA agreements with several different countries, there is another law on the horizon called CRS/GATCA.
CRS is the Common Reporting Standard and it is considered a “Global Version” of FATCA, designed to further crack down on offshore tax evasion and non-reporting of financial accounts. It also referred to as GATCA (Global Account Tax Compliance Act).
Italy Intends of Complying with CRS/GATCA
- It is not uncommon for individuals who are attempting to avoid US tax go to great lengths in order to avoid reporting their foreign accounts. In fact, we have worked with several clients who thought it may be a good idea to either renounce their US citizenship, relinquish their green card and/or take citizenship in a foreign country. Thus, believing that they could outwit the IRS.
- First, even if a person renounces their US citizenship or relinquishes the green card they may still be subject to the US “expatriate tax” depending on their earnings, assets, net worth, and whether they have complied with IRS reporting requirements.
- Second, the OECD (Organisation for Economic Co-operation and Development), which is comprised of several different countries working together to reduce tax fraud and tax evasion and improve market globalization have developed their own version of FATCA.
Italy will Comply with CRS/GATCA Beginning in 2017
The Italian Government has indicated that it has every intention of complying with the OECD Standard for Automatic Exchange of Financial Accounts implementation of CRS/GATCA and will begin reporting in early 2017. Moreover, since CRS/GATCA is based on residence and not “citizenship” reporting under CRS/GATCA will be more encompassing than FATCA (although under GATCA each country has more responsibility for developing its own agreements/reporting and compliance initiatives as opposed to the “one or two sizes fit all” IGAs of FATCA)
What is CRS?
From a technical standpoint, CRS is a type of information exchange of data between various different countries on a global scale in order to share information on the assets of income of residents in different countries. Essentially, the goal is similar to FATCA, which is to track overseas information regarding individuals who may have or be attempting to hide or shift assets offshore assets, accounts and income from whichever country they are a resident in, in order to avoid paying tax in that country.
CRS or “GATCA” (Global Account Tax Compliance Act) was developed by the OECD (Organisation for Economic Co-operation and Development) in order to combat offshore tax evasion. As provided specifically by the OECD:
“The Common Reporting Standard (“CRS”), with a view to maximizing efficiency and reducing cost for financial institutions, draws extensively on the intergovernmental approach to implementing FATCA. While the intergovernmental approach to FATCA reporting does deviate in certain aspects from the CRS, the differences are driven by the multilateral nature of the CRS system and other US specific aspects, in particular the concept of taxation on the basis of citizenship and the presence of a significant and comprehensive FATCA withholding tax.”
“Given these features, that the intergovernmental approach to FATCA is a pre-existing system with close similarities to the CRS, and the anticipated progress towards widespread participation in the CRS, it is compatible and consistent with the CRS for the US to not require the look through treatment for investment entities in Non-Participating Jurisdictions.”
(CRS) Common Reporting Standards
By implementing a common standard, it will provide different countries with general reporting requirements that all different countries should meet in order for effective exchange of information. One of the main goals of CRS/GATCA is to improve the overall exchange of information and quality of information between different countries.
The goal is that if individuals and businesses are aware that there’s going to be a common reporting standard beyond FATCA, so that no matter what country a person resides in common that information has the possibility and probability of being exchanged with a different for country (even when the United States is not involved) it will raise awareness and reduce the overall amount of offshore tax evasion – which runs rampant in almost every country.
Specifically, as provided by the OECD, ““Calling on all other jurisdictions to join us by the earliest possible date, we are committed to automatic exchange of information as the new global standard, which must ensure confidentiality and the proper use of information exchanged, and we fully support the OECD work with G20 countries aimed at presenting such a single global standard for automatic exchange by February 2014 and to finalizing technical modalities of effective automatic exchange by mid-2014.”4 They also asked the Global Forum to establish a mechanism to monitor and review the implementation of the new global standard on automatic exchange of information and stressed the importance of developing countries being able to benefit from a more transparent international tax system.”
Summary of CRS Rules
The following a summary of the law as provided by the OECD
Summary of the Common Reporting Standard (“CRS”) 26. The CRS contains the reporting and due diligence standard that underpins the automatic exchange of financial account information.
- A jurisdiction implementing the CRS must have rules in place that require financial institutions to report information consistent with the scope of reporting set out in Section I and to follow due diligence procedures consistent with the procedures contained in Section II through VII. Capitalized terms used in the CRS are defined in Section VIII. 27.
- The financial institutions (FI’s) covered by the standard include custodial institutions, depository institutions, investment entities and specified insurance companies, unless they present a low risk of being used for evading tax and are excluded from reporting. The financial information to be reported with respect to reportable accounts includes interest, dividends, account balance, income from certain insurance products, sales proceeds from financial assets and other income generated with respect to assets held in the account or payments made with respect to the account. Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations), and the standard includes a requirement to look through passive entities to report on the relevant controlling persons. 28.
- The due diligence procedures to be performed by reporting financial institutions for the identification of reportable accounts are described in sections II through VII. They distinguish between individual accounts and entity accounts. They also make a distinction between pre-existing and new accounts, recognizing that it is more difficult and costly for financial institutions to obtain information from existing accountholders rather than requesting such information upon account opening.
- For Pre-existing Individual Accounts FI’s are required to review accounts without application of any de minimis threshold. The rules distinguish between Higher and Lower Value Accounts. For Lower Value Accounts they provide for a permanent residence address test based on documentary evidence or the FI would need to determine the residence on the basis of an indicia search. A self-certification (and/or documentary evidence) would be needed in case of conflicting indicia, in the absence of which reporting would be done to all reportable jurisdictions for which indicia have been found. For Higher Value Accounts enhanced due diligence procedures apply, including a paper record search and an actual knowledge test by the relationship manager.
- For New Individual Accounts the CRS contemplates self-certification (and the confirmation of its reasonableness) without de minimis threshold. • For Pre-existing Entity Accounts, FIs are required to determine: a) whether the entity itself is a Reportable Person, which can generally be done on the basis of available information (AML/KYC procedures) and if not, a self-certification would be needed; and b) whether the entity is a passive NFE and, if so, the residency of controlling persons. For a number of account holders the active/passive assessment is rather straight forward and can be made on the basis of available information, for others this may require self-certification.
- Pre-existing Entity Accounts below 250,000 USD (or local currency equivalent) are not subject to review.
- For New Entity Accounts, the same assessments need to be made as for Pre-existing Accounts. However, as it is easier to obtain self-certifications for new accounts, the 250,000 USD (or local currency equivalent) threshold does not apply.
- While the CRS contemplates due diligence procedures generally designed to identify reportable accounts, there are good reasons why jurisdictions may wish to go wider and, for instance, extend due diligence procedures for pre-existing accounts to cover all non-residents or cover residents of countries with which they have an exchange of information instrument in place. Such an approach could significantly reduce costs for financial institutions compared to an approach where due diligence has to be performed each time a new jurisdiction joins. Such wider rules or procedures are fully consistent with the narrower reporting and due diligence rules described in the CRS. The Commentary to the CRS will contain a version of the due diligence and reporting requirements that follows such a wider approach.
CRS – Signatories
The following is a list of the most recent signatories to the Multilateral Competent Authority Agreement
- ANTIGUA AND
- BRITISH VIRGIN ISLANDS
- CAYMAN ISLANDS
- CHILE 2018
- COOK ISLANDS
- COSTA RICA
- CZECH REPUBLIC
- FAROE ISLANDS
- ISLE OF MAN
- MARSHALL ISLANDS
- NEW ZEALAND
- SAINT LUCIA
- SAINT VINCENT AND THE GRENADINES
- SAN MARINO
- SAINT MAARTEN
- SLOVAK REPUBLIC
- SOUTH AFRICA
- TURKS & CAICOS ISLANDS
- UNITED KINGDOM
Why Comply with IRS Foreign Disclosure Laws?
Because if you fail to do so, the IRS has the authority to penalize you upwards of 100% of the value of your offshore assets and accounts as well as prosecute you for criminal tax fraud and tax evasion if it is found that you acted willfully in failing to report your assets and foreign income.
The reason why international tax law compliance has taken center stage is because under the new FATCA (Foreign Account Tax Compliance Act) laws and CRS/GATCA (Common Reporting Standards/Global Account Tax Compliance Act) foreign countries are actively reporting the bank and financial accounts of US citizens and US legal permanent residents. If a foreign country is interested in working with the United States, the foreign country will enter into an “ Intergovernmental Agreement” (IGA). These agreements are reciprocity agreements, which means not only will the foreign country report the information to the IRS, but the IRS will also reciprocate by providing the same information to foreign country tax authorities.