John Richardson: 'The CRS ≠ FATCA'
When the U.S. Foreign Account Tax Compliance Act finally came into force around the world in 2014 – four years after it was signed into law by President Obama – the Organisation for Economic Co-operation and Development was preparing its own account information reporting regulations package.
The Common Reporting Standard, as it was to be known as, differed from FATCA in that it was intended to be global, and fully reciprocal – meaning that those countries participating in the collecting and forwarding of information about other countries' resident taxpayer's financial accounts would expect to receive the same data about their taxpayers resident in that country...
Apart from that (admittedly significant) difference, however, the Common Reporting Standard, as the OECD's regulation is called, was so widely acknowledged to be have been modeled on FATCA that it was often jokingly referred to during those early days as "GATCA", as if it were the "Global Account Tax Compliance Act".
Unfortunately, a funny thing has evolved over the last few years that the two regulations have been in force. And that is, a general assumption on the part of many people (who have never actually sat down and compared them) that FATCA and the CRS are, by and large, interchangeable, apart from the very big difference in the nature of the people they affect, and where these people are located.
(FATCA affects only U.S. citizens and taxpayers at home and abroad, while the CRS affects the citizens and taxpayers of 116 countries, according to the OECD's latest list, updated on July 5.)
While the U.S. isn't a CRS signatory, at least according to this list, Russia and China are, as are numerous jurisdictions often described as tax havens.
The thing is, FATCA and the CRS are not identical; it is not at all so simple. And this matters, because one often hears people saying that if the U.S. were to move to a residence-based tax regime, say, like the rest of the world has, it could simply move over to CRS as easily as someone might move from one seat on a bus or train to another.
This is not to say that it wouldn't be possible; only that, FATCA and CRS are not the same.
Here are seven ways that they're different:
1. The CRS requires the automatic EXCHANGE of information from one country to another; FATCA is not reciprocal. (Yet, some reciprocity advocates would say, especially in France at the moment...)
This is the big one. Under FATCA, there is no automatic exchange of information; rather, there is only a one-way flow of information to the United States. (As the American Expat Financial News Journal has often reported, this lack of reciprocity has been the subject of extensive discussion by lawmakers in certain countries, particuarly France, where some have even proposed legislation that would require it to be made reciprocal.
(Last year, the European Parliament devoted several pages of a document having to do with the implementation of EU requirements for the exchange of tax information to criticising the lack of FATCA reciprocity. This lack of reciprocity, the European Parliament document added, is resulting in "the United States becoming a significant enabler of financial secrecy for non-U.S. citizens" as a result.
The reason the European Parliament, along with other critics in recent years, say that FATCA (Foreign Account Tax Compliance Act) is making it possible for the U.S. to become an enabler of financial secrecy for non-Americans is because after the U.S. implemented FATCA, it has consistently declined to participate in the Common Reporting Standard (CRS), a FATCA-like data sharing regime that came along a few years later, and which more than 100 other countries around the world have signed up to.
And earlier this year, IRS Commissioner Charles Rettig apparently surprised quite a few FATCA-watchers by saying that he supported the idea of FATCA being made reciprocal. "I am a believer in transparency where transparency is appropriate," Rettig explainined, in comments that came during his testimony during an almost three-hour Senate Finance Committee hearing on the IRS and related topics.
2. The CRS is the result of a multilateral agreement in which the participating jurisdictions have voluntarily agreed to automatically perform due diligence and transfer information to the other signatories to the agreement.
This is very different from the way FATCA was introduced and continues to be implemented, which was, and is, as bilateral “agreements” that other countries have effectively been forced to agree to.
3. The FATCA IGAs potentially impose significant sanctions against BOTH the non-U.S. countries that have agreed to implement it, as well as the financial institutions in those countries, in the event that significant non-compliance is discovered.
If the country or jurisdiction in question is found to have failed to follow the directives of the IGA, it will no longer be able to shield its financial institutions from the FATCA statute, leaving them to fend for themselves.
If the bank or financial institution is found to be in significant non-compliance of its obligations under the IGA, meanwhile, it will be subject to the 30% confiscation of all U.S. dollar payments going to that financial institution.
There is nothing comparable in the CRS regulations.
4. While FATCA is aimed at all American citizen taxpayers – and thus, in the case of those Americans and other U.S. taxpayers abroad (such as Green Card-holders, mandates the transfer of information from a country where the individual typically does reside to a country where the individual does not reside, i.e., the U.S. – the CRS is different.
The CRS mandates the transfer of information from a country where the individual DOES NOT reside (but has certain financial accounts) to a country where they the individual DOES reside (and pays his or her taxes).
5. FATCA facilitates – by claiming the tax residents of other countries as U.S. tax residents (owing to their U.S. citizenship) – the expansion of the U.S. tax base into other countries.
The CRS does not expand a country’s tax base into other countries.
6. FATCA was aimed at ensuring U.S. citizens didn't use secret overseas bank and financial accounts to hide money and other assets from U.S. taxation; its major effects on expatriate Americans and Green Card holders was unforeseen. But the result is that it has formalized the U.S. enforcement of its globally unique policy of “citizenship-based taxation” around the world, in a way that had never happened previously.
The CRS, on the other hand, only enforces “residence-based taxation,” in order to prevent those taxpayers resident in CRS signatory countries from using secret overseas accounts to hide money from their local tax authority.
7. FATCA results in the United States receiving information from other countries about U.S. citizens, accidental Americans and Green Card holders living in these other countries, but doesn't oblige the U.S. to reciprocate.
The CRS, on the other hand, sees banks and financial institutions located in all 116 CRS signatory countries providing information to the tax authorities in all of the countries whose resident taxpayers they have among their account-holders, and receiving the same information about their own resident taxpayers who hold accounts abroad, in the same way.
As has been noted by growing numbers of media organizations and others, such as the UK-based Tax Justice Network, FATCA's lack of reciprocity has resulted in the U.S. becoming a tax haven for residents in CRS-compliant countries, because it is now one of the only places resident taxpayers in these countries can deposit money or invest it and not have it reported back to their home country's tax authority.
Conclusion: FATCA and the CRS are not interchangeable. And if the U.S. were to begin making plans to adopt the CRS at some point, the opposition on the part of the U.S. banking and financial services industry, which would have to begin collecting and reporting a huge amount of data that it doesn't now have to, could be expected to be significant.
Richardson, pictured left, is a Toronto, Canada based lawyer and dual U.S./Canadian citizen, who assists U.S. citizens and Green Card holders living outside the United States with their citizenship issues, while also advocating for fairer treatment for such expats and Green Card holders. He also frequently interviews such individuals and others for AXFNJ podcasts, which may be found and listened to by clicking here.
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