key differences between fatca and the common reporting standard · 2016-10-11 · key differences...
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Key Differences Between FATCA and the Common Reporting StandardCarlene Hornby Allen, Partner, KPMG Canada, Co-Leader National
FATCA, CRS and QI Practice
Danielle Nishida, Managing Director, Washington National Tax,
KPMG LLP
October 18, 2016
Common Reporting Standard Due Diligence
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101 Jurisdictions have agreed to implement CRS as of September 27, 2016
– New signers includes Panama, Lebanon, Bahrain, Nauru, & Vanuatu
82 Jurisdictions have signed the Multilateral Competent Authority Agreement as of June 3, 2016
– Agrees to automatic exchange of information with all signers
– Noteworthy recent signers include Russia, Israel
Start date differs based on jurisdiction
– 54 Early adopters must begin onboarding procedures January 1, 2016
– 47 Late adopters must begin onboarding procedures January 1, 2017
– Some countries are starting on July 1, 2017 (Australia, New Zealand, Canada)
Canadian Law and CRS Guidance:
- Draft legislative proposals and Explanatory Notes issued for consultation on April 15, 2016
- Comment period closed on July 15, 2016
- Revised legislation and explanatory notes expected Autumn 2016.
- Requests for self-certification under CRS already received by Canadian entities
Implementation of CRS
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Documentation Process is similar to FATCA:
– CRS is focused on review of financial accounts
– Financial account definition generally similar to IGA
– In Canada, definition for CRS exempts the debt/equity interests of certain investment advisors and portfolio managers
(which currently differs from Canadian FATCA)
– Exception for excluded financial accounts (generally the same as FATCA with a couple additions: credit card accounts and
any other low risk account the country adds)
– In Canada, does NOT explicitly exclude TFSAs
Onboarding of new accounts focuses primarily on obtaining self-certifications
– Canadian FATCA initially allowed more flexibility (though most institutions required self-certifications). Under Canadian CRS,
self certifications must generally be obtained from new individual and entity accountholders. To provide greater alignment
between Canadian FATCA and CRS requirements, amending legislation was released which requires self-certifications to be
obtained for Canadian FATCA purposes effective July 1, 2017
– Will potentially lead to an additional subset of accounts for impacted Canadian financial institutions
– Utilization of Form W-8BEN-E:
– Can use for FATCA as a self-certification
– Revised Form W-8BEN-E resolves classification issues
– Still confusion regarding Forms W-8BEN-E collected for QI and FATCA purposes
– Forms W-8BEN-E not relevant for purposes of CRS documentation
Onboarding under CRS
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Remediation Process for Individual Accounts
– Similar process as FATCA:
– Lower value accounts subject to indicia search of electronic records
– High value accounts subject to indicia search of electronic records, manual search of other files, and relationship manager
inquiry
However, CRS provides exception for lower value preexisting individual accounts
– May rely upon a residence address test instead of electronic search (Canada adopted this option)
– Requires that a current residence address is on file that was obtained from documentary evidence
Remediation Process for Entity Accounts
– Both FATCA & CRS provide $250K de minimis exception for preexisting entity accounts
– 2 Part Process under CRS:
– Determine whether entity is reportable: May determine residence based on information on file
– Determine whether entity’s controlling persons are reportable:
– Should generally obtain self-certification to determine status (e.g., FI, active NFE, or passive NFE) unless there is
sufficient information on file or in publicly available information to determine status
– Look-thru required for passive NFEs (which includes some investment entities)
– $1M threshold for relying solely on AML procedures to identify controlling persons (otherwise self-certification is
required)
Remediation of Existing Accounts Under CRS
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Both FATCA and CRS rely heavily on self-certifications, however, the self-certifications differ
– As FATCA/CRS statuses differ, account holder must provide its status for each regime
– CRS requires account holder to provide all countries of residence with TIN for each country (unless country did not issue TINor does not require collection of TINs)
– Self-certifications for individuals require date of birth and, for countries that require it, place of birth
– Draft Canadian legislation does not require place of birth
– Countries may be updating local self-certification forms created for FATCA to accommodate CRS as well (e.g., Cayman Islands), but until that is done, FIs may need to create their own self-certification form and a variety of forms will likely beutilized globally (already seen in Canada)
– It is expected that Canadian government will release sample self-certification forms for both individual and entity accounts that can be used for both FATCA and CRS documentation purposes
– Care must be exercised if drafting form instructions or cheat sheets that instructions do not verge on providing tax advice
Documentation Required for CRS
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What about accepting self-certification created by account holder?
– This is acceptable as long as--
– The form specifies the country for which the form is provided (i.e., the country in which the account is maintained); and
– The form specifies a status accepted in that country
– May not be necessary for an FI in a participating jurisdiction but could matter to an NFE, EBO, or entity in non-participating jurisdiction
– Given large numbers of undocumented accounts many FIs are accepting this option
Like FATCA, CRS provides limited option to rely upon information in file and publicly available when documenting an entity account (which would include documentary evidence) though this has same issues as with FATCA (burden and risk now on FI to determine proper status).
– Note that CRS requires self-certification for new individual accounts and for entity accounts when determining residence of entity and any controlling persons.
Documentation Required for CRS
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CRS statuses are similar to FATCA statuses except many statuses have been eliminated due to one of the following
reasons :
U.S.-centric statuses have been removed
– E.g., Territory FIs/NFFEs, Restricted Funds, Treaty-based pension funds
CRS is intended to apply very broadly so de minimis or local exceptions have been removed
– E.g., Local FFIs, Nonregistering local banks, FFIs with only low value accounts, limited life debt investment entities
– Of particular relevance in Canada as many FFIs relied on the exception for financial institutions with a local client base
No need for sponsored categories
– Benefit of sponsored exceptions was primarily for registration relief
– As CRS does not generally require registration there is no need for sponsored categories
– Note, however, certain countries have created own registration processes (Canada has not)
– Same effect can be reached through agency agreements
FATCA Status vs CRS Statuses
In addition, each country may add own low-risk categories under CRS
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Under FATCA a non-reporting FFI has 2 meanings:
1) FIs that are non-reporting generally have no due diligence obligations in home country. Note that in Canada certain types of
NRFFIs do have limited due diligence obligations. However, reporting is generally not required so long as the due diligence
does not uncover anything that requires reporting; &
2) FIs that are non-reporting will be respected as deemed compliant entities by all other FFIs, no matter the jurisdiction.
Reason:
– US regulations tie together all the non-reporting FI statuses from the IGAs/local guidance and make them CDCFFIs
– Local guidance generally incorporates any entity treated as DCFFI under US regulations
However, CRS doesn’t work the same way. Under CRS:
1) Non-reporting FI classification means that FI has either no or lesser due diligence obligations in home country. In Canada
there will be limited due diligence requirements in certain circumstances.
2) For purposes of completing self-certification, relevant determination for an FI should be:
– Financial institution from participating jurisdiction (reporting or non-reporting)
– Financial institution from non-participating jurisdiction (and not reclassified as passive NFEs)
– Passive NFE (for managed investment entities that got reclassified)
Example of this issue: A professionally managed US pension fund should select “passive NFE” instead of “non-reporting FI”.
Is “Nonreporting FI” relevant for CRS documentation purposes?
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Must identify natural persons who exercise control over the entity
– Must identify at least one natural person but may be more (different from FATCA)
– Controlling persons for each country are determined under FATF rules applicable to that country
– In many jurisdictions, includes owners above identified threshold & chief officer when no owners identified.
– Requires looking through certain entities until natural person is found
– Unlike substantial US person test, there are no entity blockers for controlling persons
– For trusts, includes settlors, trustees, protectors, beneficiaries, and any other natural person with ultimate effective control
What about when controlling person is not from a reportable jurisdiction (e.g., U.S. controlling persons for most
countries)?
Only required to collect:
– Name,
– Address, &
– Jurisdiction(s) of Residence
– In Canada, this will generally only apply where a controlling person is a Canadian or a US tax resident. In this instance, it is
currently contemplated that all that will be required is a representation that the entity does not have any controlling persons
who reside for tax purposes in a jurisdiction other than Canada or the United States
– Some forms direct all controlling persons to complete certification even if local guidance does not require this
– But note exception for countries that make every jurisdiction a reportable jurisdiction (e.g., Ireland and Canada require
reporting for all foreign jurisdictions other than United States)
Identification of Controlling Persons for CRS
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Some Key Differences Regarding Individual AccountsFATCA CRS
Reportable Accounts ‒ U.S. Citizens & U.S. Tax Residents ‒ Residents of any Reportable Jurisdiction
Data collected ‒ Reliance primarily on TIN (with DOB as alternative as
applicable).
‒ FI will generally collect TIN plus DOB and place of birth.
Canada does not currently require place of birth.
De Minimis Exceptions ‒ FATCA provides de minimis exceptions for individuals ‒ No de minimis exceptions under CRS
Review of Lower Value
Accounts
‒ Generally required to apply indicia search ‒ May choose to apply indicia search or residence
address test
Undocumented accounts ‒ Generally undocumented accounts are treated as
reportable accounts
‒ Certain undocumented accounts (hold mail instructions
with no doc evidence) will be treated simply as
undocumented
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Some Key Differences Regarding Entity AccountsFATCA CRS
Reportable Accounts ‒ U.S. Entities, certain non-US entities
controlled by US persons, and NPFIs
‒ Residents of any Reportable Jurisdiction
Look Thru Reportable
Entities
‒ Once an account is reportable, there is no further look-
thru required
‒ Required to look-thru even reportable entities (much
more complicated from an systems perspective)
Passive Investment
Entities
‒ Identifying Substantial U.S. owners (or controlling
persons) of Passive NFFEs
‒ Identifying controlling persons of passive NFEs which
includes certain investment entities in non-participating
jurisdictions
Payments Outside of
Financial Account
‒ Must document entities receiving withholdable
payments outside of financial account
‒ As no withholding applies for CRS, no need to document
entities outside of financial account
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Due Diligence: FATCA vs. CRS
─ Must determine whether there is actual
knowledge or reason to know status is incorrect
or unreliable
─ Reliance on indicia review for residence status
─ Both regimes include a review of AML/KYC
documentation
─ Must look for changes in circumstances
For both FATCA & CRS, due diligence involves same framework
─ Rather than merely looking for U.S. indicia, FI
must now look for all indicia of any Reportable
Jurisdiction
─ May want to identify indicia for all countries so
that account review does not need to be redone
when new countries sign on
─ Logistically this places a greater burden on
systems to track this information
─ Consider whether it is simpler to just require
self-certification and documentary evidence from
all accounts to automatically cure indicia
Key difference is scope
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Indicia for FATCA vs CRS
─ Current Permanent Residence Address
─ Current Mailing Address
─ Telephone Number when no other telephone
number is present (i.e., no foreign number for
FATCA or no number inside reporting FI’s country
for CRS)
─ Address of POA/signatory
─ Hold mail or care-of-address as only address
Both FATCA and CRS look forthe following indicia
─ Status as U.S. citizen or U.S. tax resident under
FATCA vs. status as resident of reporting country
under CRS
─ Place of Birth
─ CRS does not treat place of birth as indicia
─ Reason: CRS looks only at residence and not
citizenship
─ Standing instructions to pay accounts
─ Under FATCA standing instructions apply to
all accounts
─ Under CRS standing instructions apply to
accounts other than depository accounts
Differences between FATCA & CRS
Identification of Reportable Accounts
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Who must be reported? – Reportable Persons FATCA The term “Reportable Person” under FATCA generally
includes any individual or entity that:
1. Is a specified U.S. person;
2. Is a passive NFFE with a controlling person that is a
specified U.S. person (for IGA jurisdictions such as Canada)
or with a substantial U.S. owner (for non-IGA jurisdictions);
3. Is an owner documented FFI with an owner that is a
specified U.S. person (if entity elects to use this category);
and
4. Is an undocumented account holder that is presumed to be
a reportable person;
Specified U.S. person does not include the following:
I. a corporation the stock of which is regularly traded on an established securities market;
II. Certain corporations that are related to a corporation described in (l), above;
III. U.S. government, state, territory, or wholly owned agency or instrumentality;
IV. a bank;
V. a REIT;
VI. a RIC;
VII. a 501(a) organization;
VIII. a common trust fund;
IX. certain exempt trusts (including trusts covered by 403(b), 457(g), 664(c), or 4947(a)(1));
X. a dealer; or
XI. a broker
FATCA also requires reporting of account holders that are nonparticipating FFIs
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FI is required to report “reportable accounts” which includes any account held by a reportable person and any passive
NFE with a controlling person that is a reportable person
The term “Reportable Person” under CRS generally includes any individual or entity that:
1. Is a tax resident of any Reportable Jurisdiction
2. Is not any of the following:
i. a corporation the stock of which is regularly traded on an established securities market;
ii. a corporation that is a Related Entity of a corporation described in (i), above;
iii. a governmental entity;
iv. an international organization;
v. a central bank; or
vi. a financial institution.
Exception: an entity that otherwise qualifies as an FI will instead be classified as a Passive NFE if:
a. it is an Investment Entity that is not a Participating Jurisdiction FI and that is managed by another FI, and
b. it has one or more controlling persons who are reportable persons.
Reportable Persons may include:
1. Individual account holders & Individuals that are Controlling Persons of a Passive NFE account holder
2. Active NFE account holders; and
3. Passive NFE account holders.
Who must be reported?
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Who must be reported? – Reportable PersonsThe term “Reportable Jurisdiction” generally means a jurisdiction (i) with which an agreement is in place
pursuant to which there is an obligation in place to provide the information specified in Section I, and (ii) which
is identified in a published list. In Canada, the term “Reportable Jurisdiction” is defined as any jurisdiction other
than Canada or the United States of America.
Each CRS implementing jurisdiction has its own list of Reportable Jurisdictions and Participating Jurisdictions.
In Canada, Reportable Jurisdictions include all jurisdictions other than Canada and the United States of
America. Canada is anticipated to release its own list of Participating Jurisdictions.
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Treatment of Undocumented Accounts Under FATCAUnder Treasury Regs entity accounts of PFFIs generally default to NPFFI status (very simple process)
IGAs do not spell out presumption rules
Generally undocumented accounts are treated as U.S. reportable accounts for account reporting purposes but what does that
mean for an entity? Is entity reportable or are controlling persons reportable?
IGAs generally indicate an ordering process when performing due diligence procedures on preexisting entity accounts:
Step 1: Look for evidence entity is US person (i.e., U.S. indicia) – entity should default to specified US person absent
evidence otherwise
Step 2: Look for indication entity can be treated as FI -- entity should default to NPFFI absent evidence otherwise. Note
that the Canadian rules require NPFFI treatment only where the account is first determined to be held by an FI, and then
only then when the FI chooses to document through a self certification and is unsuccessful in obtaining one.
Step 3: All other entities seem to default to NFFE status which should default to passive NFFE absent evidence
otherwise. This means looking through to report controlling persons.
BUT for M1 countries look to local guidance for any variations
What about for new accounts? Technically probably should close account. In Canada, there is no requirement to close the
account. Rather, the account generally becomes reportable.
However, when withholdable payment is made to account presumption rules may differ
M2 FFIs clearly must follow Treasury Regulations under FFI Agreement here so will have a dual status of NPFFI for
withholding purposes (either because M2 FFI is doing own withholding or is passing up withholding)
Not as clear for M1 FFIs but they must likely follow Treasury Regulations as well which would also mean a dual status (NPFFI
status when passing up withholding and alternate status for account reporting)
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Treatment of Undocumented Accounts under CRS Common Reporting Standard also does not spell out presumption rules
Steps for preexisting entity accounts
Step 1: Look for evidence entity is a resident of a reportable jurisdiction. If yes, report entity to that jurisdiction AND proceed to Step 2.
Step 2: Recommend defaulting entity status to passive NFE absent evidence otherwise. This means looking through entity to identify any controlling person(s). Unless account is <$1M USD, if no self-certification is provided then controlling person(s) should technically be reported for all reportable jurisdictions.
BUT look to local guidance for any variations
For new accounts, getting documentation is mandatory (even upon a subsequent change in circumstances) so technically an account should be closed if required documentation is not obtained. In Canada, if the rules are similar to FATCA, there will likely not be a requirement to close the account.
Recommended steps for new accounts if FI decides not to close account:
For an undocumented individual account (i.e., an individual account that is not a preexisting account), individual should be reported to all reportable jurisdictions, even if there is no indicia for those jurisdictions
Follow steps for preexisting entity accounts (without any exception for accounts <$1M USD)
Note that preexisting individual accounts are not treated as undocumented accounts because documentation is not required. Rules only require indicia review and reporting based on indicia (unless such indicia is cured).
2014 2015 2016 2017 2018 2019 2020
CRS Timeline for Canada (as of October 7, 2016)
A
G
July 1, 2017
Canadian CRS legislation
(Part XIX of the ITA) comes
into force.
Accounts opened on or after
this date will be referred to as
“New Accounts”.
New Account opening
procedures must be in place
to record tax residence.
K
February 22, 2014
G20 endorsed global
standard for AEoI
(including the CRS).
December 31, 2018
Complete due diligence
procedures for “High
Value” Preexisting
Individual Accounts.
* Declaration can be accessed at http://www.oecd.org/mcm/MCM-2014-Declaration-Tax.pdf
May 6, 2014
The new standard
declaration was
signed by more than
40 countries.*
C
December 31, 2019
Complete due diligence procedures for “Low
Value” Preexisting Individual Accounts and
Entity Accounts.
Complete due diligence procedures for
Preexisting Entity Accounts not exceeding
US$250,000 on June 30, 2017, but exceeding
US$250,000 on December 31, 2018.
M
HMay 1, 2019
Report to CRA
Reportable
Accounts for 2018.
J
May 1, 2018
Report to CRA
Reportable
Accounts for 2017.
June 30, 2017 F
Accounts opened
on or before thisdate will be referred
to as Preexisting
Accounts.
B
April 15, 2016
CRS proposed legislation
released in Canada.
E
DJune 2, 2015
Canada committed to the CRS
by signing the Multilateral
Competent Authority Agreement.
L
September 30, 2019
Annual exchange of
information between
Canada and other
participating jurisdictions
to occur on or before
September 30
December 31, 2020
Complete due diligence
procedures for Preexisting
Entity Accounts not
exceeding US$250,000 on
June 30, 2017, but
exceeding US$250,000 on
December 31, 2019.
P
May 1, 2020
Report to CRA
Reportable Accounts
for 2019.
N
September 30, 2020
Annual exchange of
information between
Canada and other
participating
jurisdictions to occur on
or before September 30
O
September 30,
2018
First exchange of
information between
Canada and other
participating
jurisdictions to occur
on or before
September 30
I
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG
name and logo are registered trademarks or trademarks of KPMG International.
February 13, 2014
OECD released the CRS.
Thank youCarlene Hornby Allen
Partner
Email: [email protected]
Phone: 604-691-3097
Danielle Nishida
Managing Director, KPMG LLP
Email: [email protected]
Phone: 212-954-2774
kpmg.ca
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG
name and logo are registered trademarks or trademarks of KPMG International.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular
individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on
such information without appropriate professional advice after a thorough examination of the particular situation.