Foreign Account Tax Compliance Act (FATCA)
FATCA is a legislation of the United States of America, which aims to combat tax evasion by the taxpayers in the country. It was enacted in 2010 to increase income tax reporting by U.S. taxpayers on assets held in offshore accounts and through Non-U.S. entities.
FATCA is used by government personnel to detect indicia of U.S. persons and their assets and to enable cross-checking where assets have been self-reported by individuals. Accordingly, the U.S. Government has entered into bilateral agreements with the government of several countries for exchange of information.
Common Reporting Standard (CRS)
The Global Forum on Transparency and Exchange of Information for Tax Purposes is the multilateral framework within which work on transparency and exchange of information for tax purposes has been carried out by both OECD (Organization for Economic Co-operation and Development) and non-OECD economies since 2000.
The CRS is a broad reporting regime that aims to tackle tax evasion and draws its approach extensively from the FATCA implementation. It covers a broad range across three dimensions, i.e., the scope of financial information reported, the scope of account holders subject to reporting, and the scope of financial institutions required to report. In 2015, the United Arab Emirates (UAE) enacted CRS that applies in all UAE jurisdictions, including the financial free zones such as the Dubai International Financial Centre (DIFC). The UAE had committed to implement the CRS, with the first exchange already in place from September 2018.
The mechanism of CRS in UAE is illustrated as under:
Overview of the obligations under FATCA and CRS
To ensure that the Financial Institutions properly comply with the FATCA/CRS regulations, it is crucial that they are aware of their FATCA/CRS obligations. For this purpose, the following steps gain importance:
UAE entities registered under DIFC should consider getting evaluated by applying the FATCA CRS regulations to determine their obligations and to ensure that the appropriate processes and procedures are implemented in order to meet the compliance. All relevant DIFC entities are required to report annually, via the DIFC Client Portal with regards to both CRS and FATCA. The DIFC Client Portal is available from 1 June 2020 to 31 July 2020 for DIFC CRS and FATCA reporting for the reporting period ending by 31 December 2019.
It must be noted that non-compliance with the DIFC FATCA CRS regulations may lead to serious penal consequences. Examples of non-compliance are failure to maintain appropriate documentation with respect to the financial accounts in order to determine reportable accounts, failure to report information with respect to reportable accounts, or inaccurate reporting of reportable accounts, etc. The penalties, as provided under the DIFC CRS regulations may range from USD 2,800 up to USD 70,000 depending on the type of contravention.
However, in order to avoid such risks, it is recommended that the reporting obligations be evaluated and necessary steps are taken to ensure that an entity is compliant with the DIFC FATCA CRS regulations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.