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US GAO report makes recommendations to address overlap in foreign asset reporting requirements

Monday, 8 April, 2019

A report by the US Congress's General Accounting Office (GAO) explains why Washington is reluctant to abandon its Foreign Account Tax Compliance Act (FATCA) system.

FATCA came into force in 2014. It requires foreign financial institutions (FFIs) to disclose their US clients' accounts, either to their own domestic tax authority or directly to the US Internal Revenue Service (IRS).

In 2014, there was no generally available international method to share account information between countries, other than ad hoc tax information agreements. However, in that same year the OECD published a proposed global standard for the automatic exchange of information between any two tax authorities worldwide. This Common Reporting Standard (CRS) was based on the FATCA arrangements, but without any US-specific references. Moreover, it is couched in terms of the tax residence of individuals and not their citizenship, unlike the FATCA agreements.

The CRS has now been implemented by many countries, and automatic exchange of account information has begun. This has led to international pressure on the US to switch from its still-operational FATCA system to the CRS instead, thereby reducing compliance burdens on FFIs.

However, the GAO report notes significant differences between the two that are likely to deter the US Treasury from doing this. Some are due to the US' near-unique policy of subjecting US citizens living abroad to US taxation in the same manner as US residents.

Moreover, the FATCA arrangements require banks to report the foreign-held accounts of US citizens and residents, including resident aliens, while CRS requires financial institutions (FIs) in participating jurisdictions to report on almost all accounts held by non-residents of the reporting country.

Thus, under CRS rules, information about foreign accounts held by a US citizen with a tax residence abroad would not be reported to IRS, but rather to the jurisdiction in which the individual was tax resident.

According to US Treasury officials, to align FATCA and CRS, the United States Congress would need to revise statutes to:

  • provide for the collection of information for accounts that residents of other jurisdictions maintain at US FIs;
  • require certain US FIs to report the account balance for all financial accounts maintained at a US office and held by foreign residents;
  • expand the current reporting required with respect to US source income paid to accounts held by foreign residents to include similar non-US source payments;
  • require FIs to report the gross proceeds from the sale or redemption of property held in, or with respect to, a financial account; and
  • require FIs to report information with respect to financial accounts held by certain passive entities with substantial foreign owners.

Adopting the CRS reporting system in lieu of FATCA would result in no additional benefit to the IRS in terms of obtaining information on US accounts. Additionally, it could generate additional costs and reporting burdens to US FIs that would need to implement systems to meet CRS requirements. The extent of these costs is unknown. Moreover, adoption of CRS would create circumstance whereby foreign accounts held by US citizens with an overseas tax residence, including those US citizens who have a US tax obligation, would not be reported to IRS. Almost all the gains would accrue to FFIs, with the costs and disadvantages being borne by the US Treasury: making it an unlikely course for Washington to adopt.