In a recent post by TAINA Technology, the company dug deeper into remaining compliant with FATCA and CRS compliance in APAC.
Governments worldwide share a common goal of tackling tax evasion, necessitating collaboration across all jurisdictions. The Automatic Exchange of Information (AEOI) serves as a channel for countries to swap account holder data, enhancing transparency and combating tax evasion in the process.
Two international regulations, namely the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS), form the pillars of this effort.
The US enforced FATCA in 2014, adding Chapter 4 to its Internal Revenue Code (IRC). This mandates foreign financial institutions (FFIs) to divulge certain details regarding financial accounts held by US taxpayers or foreign entities where US taxpayers possess significant ownership interest to the Internal Revenue Service (IRS). A withholding tax of 30% can be levied by the IRS on withholding agents failing to present valid tax documentation.
Parallelly, the Organisation of Economic Cooperation and Development (OECD) introduced the Common Reporting Standard (CRS) in 2014, a due diligence and reporting system that local tax authorities have incorporated into local legislation. The number of jurisdictions adopting CRS grows each year.
An Intergovernmental Agreement (IGA) with the US must be in place before a country can integrate FATCA into its legal framework. Depending on the model of IGA (Model 1 or 2), the IGAs mandate FFIs to report US account holder information either directly to the IRS or to the local tax authority for further exchange with the IRS.
Presently, FFIs in numerous Asia Pacific (APAC) countries are bound by FATCA obligations. These countries include Australia, Hong Kong, Japan, Malaysia, New Zealand, Singapore, Taiwan, India, South Korea, Vietnam, and Cambodia.
In 2023, more than 117 jurisdictions had pledged to exchange account holder information under CRS, weaving it into their local legislation. These jurisdictions have multilateral or bilateral agreements detailing the necessary information for exchange.
Currently, financial institutions in various APAC countries have CRS obligations. These countries include Australia, Hong Kong, China, Indonesia, Japan, Malaysia, New Zealand, Singapore, Taiwan, India, Korea, and Thailand (2023).
FATCA and CRS vary in their application scope for APAC financial institutions. FATCA pertains to US individual and entity accounts, and Passive Non-Financial Foreign Entity (PNFFE) accounts held by substantial US owners. CRS, on the other hand, casts a wider net, necessitating financial institutions to identify account holders who are tax residents in any CRS participating jurisdictions. It also has more stringent “look-through” requirements for controlling persons of Passive Non-Financial Entities (NFE).
FATCA due diligence is carried out using IRS Forms W-9 or W-8 series, while CRS due diligence is executed through self-certification forms. Non-compliance with these regulations could result in penalties, fines, and reputational risk. For instance, FATCA enforces a 30% withholding tax on withholding agents who disregard the due diligence requirements, whereas penalties for CRS non-compliance vary from jurisdiction to jurisdiction.
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