One of the main streams of income to any government in the world is taxes. Collecting taxes is a major way to promote and generate public revenue.
Many countries have discovered that some businesses are adjusting their investments to avoid their responsibility to pay taxes. Governments have faced challenges with tax evasion for years as it a serious offense that comes under criminal charges.
Tax evasion robs the government of the money needed, reduces the effectiveness of the government, and increases budget deficits.
In order to tackle the issue of tax evasion, governments globally decided to establish international systems for reporting on financial accounts through the Automatic Exchange of Information (AEOI).
AEOI is the cross-border sharing of information by tax administrations most commonly, Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS).
FATCA and CRS are globally organized systems for the automatic exchange of financial information of individuals and entities.
FATCA and CRS have ensured a decline in tax evasion globally and the health of the international financial system.
FATCA model as an example for AEOI
FATCA and its implications globally
FATCA is a 2010 United States federal law requiring all non-US Foreign Financial Institutions (FFIs) to search their records for customers with indicia and to report the assets and identities of such persons to the US Department of the Treasury
FATCA and the State of Kuwait
As of April 29, 2015, the FATCA agreement was signed between the State of Kuwait’s Ministry of Finance and the U.S department of the Treasury.
Kuwait’s financial institution were obliged to submit financial account details of US accounts including those of substantial US owners to the Ministry of Finance in Kuwait to transfer information to the Internal Revenue Service (IRS).
CRS model as an example for AEOI
CRS and its implications globally
The Common Reporting Standard (CRS) is an information standard for automatic exchange of tax and financial information on a global level which the Organization for Economic Cooperation and Development (OECD) developed in 2014.
As a global solution to combat tax evasion and a preventive measure to monitor clients with offshore financial accounts annually,
more than 100 countries had signed an agreement to implement it. CRS requires financial institutions in reportable jurisdictions to fulfil due diligence procedures, to document and classify accounts under CRS and report on the financial information.
CRS and the State of Kuwait
On August 19th, 2016, the State of Kuwait signed the Multilateral Competent Authority Agreement (MCAA) with the OECD.
Kuwait’s financial institution were obliged to submit financial account details of reportable accounts including those of controlling persons in Passive NFFE’s (Non-Financial Foreign Entity’s) to the Ministry of Finance in Kuwait to transfer information to the corresponding jurisdiction country through the OECD.
All Financial institutions operating in Kuwait are obligated to meet with the reporting obligations in accordance with FATCA and CRS by the 30 August and 31 May annually respectively.
Failure to report on time each year to disclose specified foreign assets, may subject the financial institution to penalties from local authorities.
The main question is where we go from here
AEOI mandates the automatic exchange of information between countries on specific dates annually. The information exchange is continuous and not based on annual formal requests.
Therefore, it is mandatory to exchange financial information to the IRS and the OECD to prevent tax evasion.
Benefits from being FATCA/CRS compliant
- Ensuring compliance with the applicable legislative requirements regarding FATCA/CRS within the various countries.
- Minimizing risk of balances withheld in corresponding countries that are under the umbrella of FATCA/CRS agreements.
- Minimizing risks of exposure to monetary penalties and sanctions.
- Supporting cross-border business transactions.
- Enhancing the business entity’s name and inspiring business growth.
Differences between FATCA / CRS
FATCA and CRS introduced by the IRS and OECD creating a unique system to maintain the main objection which is tax evasion.
Although systems such as FATCA and CRS withhold the same objection they differ in approach, such as:
| Description | FATCA | CRS
|
| Government Authority | Internal Revenue Service – (IRS) – USA | Organization for Economic Cooperation and development – (OECD) |
| Agreement nature | Bilateral nature | Multilateral |
| Focus and research | US persons with foreign assets | Multilateral persons with accounts broad |
| With holding | 30% withholding of non-compliant persons | No withholding |
| Account Scope |
– US individual account – Passive NEFE account help by controlling persons also substantial US owner. |
– Individual account
– Entity account held by tax residents of any CRS jurisdiction. – Passive NEFE account help by controlling persons that are resident in a reportable jurisdiction. |
| TIN | US TIN (Tax information number) | National TINs in reportable jurisdiction
– (AEOI)’s portal. |
| Reporting | To IRS in the USA | To and from tax administration on both sides |
| Type of agreement with Kuwait Ministry of Finance | one-to-one agreement | Multilateral agreement |
In conclusion tax is important to governments all around the world as it finances the government investments.
Hence, governments have tackled tax evasion with the development of systems through AEOI. This has been achieved through the support of many countries across the globe who have agreed upon applying FATCA and CRS to monitor and report the financial accounts to the IRS and the OECD.
Therefore, financial institutions must comply with FATCA and CRS today to operate in and remain part of the international financial system.