My son came to me the other day and asked me why a cat is not a dog. An interesting question especially through the eyes of a child. He then went on to explain his thinking. Cats and dogs both have four legs, a tail, and make ideal pets. As we began to discuss the differences, however, we realized the two were not at all the same.
The same can apply in the tax world. Take the Foreign Account Tax Compliance Act (FATCA) and the Common Standard on Reporting and Due Diligence for Financial Account Information (CRS), for example. They may have similar characteristics, but the two cannot be treated in the same way.
Foreign Account Tax Compliance (FATCA) is a U.S. federal tax law which promotes cross border tax compliance through an international standard for the automatic exchange of information related to U.S. persons. FATCA requires that foreign financial institutions (FFIs) and certain other non-financial foreign entities (NFFEs) report to the Internal Revenue Service information about financial accounts on foreign assets held by their U.S. account holders or by foreign entities in which U.S. persons hold a substantial ownership interest. It imposes withholding @30% where the applicable documentation and reporting requirements are not met.
Inter-Governmental Agreements:-
To implement FATCA, U.S. has developed Two model inter-governmental Agreements:-
Model 1:- This requires FFIs to report all FATCA related information to their local authorities, which would then report the same to the IRS.
Model 2: Under this model FFIs need to register with the IRS and sign a version of FFI agreement modified to reflect the IGA. Further FFIs are to report all FATCA related information directly to the IRS.
Common Reporting Standard (CRS):- CRS is a global reporting standard initiated by OECD for the automatic exchange of information (AEOI). It requires the FIs to collect and report information in respect of non-resident account to other CRS participating jurisdictions on a yearly basis. So far 98 countries have signed the CRS Multilateral Competent Authority Agreement (CRS MCAA) on Automatic Exchange of Financial Account Information.
India has signed model 1 IGA for implementing FATCA according to which Indian FIs will provide necessary information to the Indian tax authorities, which will be then transmitted to the U.S. annually. U.S. will also provide substantial information about Indians having financial assets in the U.S.
Further India has also signed the CRS MCAA which requires institutions of the source jurisdiction to collect and report information to tax authorities about account holders resident in other countries such information having to be transmitted automatically on yearly basis.
Penalties: The annual FATCA and CRS report in form 61B is to be furnished by May 31 of the following year. Failure to file 61B shall attract a penalty of Rs 500 per day. Providing inaccurate particulars attracts a penalty of Rs 50,000.
Undoubtedly, the widespread adoption of the OECD's proposals will bring about extraordinary change as countries worldwide begin to implement policies to align with the new global guidelines. The focus should be on global transparency, cross-country consistency and in-country certainty - taking into account the fact that CRS, like a dog, may require a bit more attention.
The author is a practicing Chartered Accountant and can be reached at sandeep@kcccas.com.
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