Key Differences Between FATCA and the Common Reporting Standard · 2016-10-11 · Key Differences Between FATCA and the Common Reporting Standard Carlene Hornby Allen, Partner, KPMG

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

3© 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.

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



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



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



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



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



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



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?



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



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



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



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



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



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



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?



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.



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)



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.

http://www.oecd.org/mcm/MCM-2014-Declaration-Tax.pdf

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.

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Key Differences Between FATCA and the Common Reporting Standard · 2016-10-11 · Key Differences Between FATCA and the Common Reporting Standard Carlene Hornby Allen, Partner, KPMG