Overview

In 2013 and 2014, the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) were introduced into the legal frameworks of various jurisdictions to combat global tax avoidance and increase transparency. 

Both these Automatic Exchange of Information (AEOI) regimes work on a similar model, requiring financial institutions to report information including account balances for any reportable account holders that they hold. 

While FATCA is concerned only with US citizens that hold foreign (i.e. non-US) assets in participating jurisdictions, the CRS requires all financial institutions in participating jurisdictions to share information about their account holders in other reporting countries. There are, however, other differences. 

Studies about the effectiveness of FATCA and the CRS have shown that there has been a reduction of cross-border deposits held in tax havens. Nevertheless, this has come at the cost of an increased compliance burden to many investment funds, requiring them to improve onboarding processes, collect additional information on investors and develop robust reporting procedures. Funds have also had to monitor the rules closely in recent years, as new rules have been added and others refined to improve alignment with the regimes’ objectives. 

A decade on from the implementation of FATCA and the CRS, we ask the question, have these regimes lost their shine? 

This article briefly looks at how these frameworks have changed the due diligence, compliance, and reporting obligations for financial institutions in the investment fund industry.

1.    Nil Return Filings

Many jurisdictions, such as Luxembourg, have already imposed mandatory nil return filing obligations. Others, such as Jersey, have announced that they will soon follow suit. 

This impacts many investment funds, in particular unregulated funds whose investor base consists entirely of other financial institutions acting as nominees for other investors. Such funds would qualify as reporting financial institutions but would have nothing to report due to not having any reportable account holders. In such cases, a mandatory nil report filing obligation would arise. 

In many jurisdictions, investment fund managers benefit from a FATCA exemption for non-reporting financial institutions. There is no equivalent classification for CRS purposes; under this regime, an investment fund manager would typically be classified as a reporting financial institution with no financial accounts. 

Prior to the introduction of mandatory nil reporting, the outcome for investment fund managers would have been the same under both FATCA and CRS, with nothing to report under either regime. However, a CRS nil filing obligation now arises for such entities in jurisdictions where there are mandatory nil filing requirements, on the basis that the entities are reporting financial institutions. 

In our experience, mandatory nil filing requirements have increased globally and will further increase the compliance burden on investment funds and investment fund managers. 

It is essential to start planning well in advance of the relevant reporting periods to avoid missed submissions. Although the reporting periods run from May to July, we generally recommend that preparations should start as soon as the year-end account balances are available.

2.    Technical and Data Requirements

When it comes to the annual FATCA and CRS reporting, there are notable differences between jurisdictions. Some, such as the UK, will accept combined AEOI reports, while others, such as Luxembourg require separate FATCA and CRS files. 

The submission methods can also differ across countries, with some tax authorities requiring prior registrations or notifications, which can take several days to process in some cases before reports can be submitted. Finally, submission of reports in an XML format is now encouraged, with some jurisdictions no longer accepting manual submissions unless there are exceptional circumstances. 

It is also notable that there have been several changes to the AEOI frameworks since their introduction, reflecting their aim to capture more and better-quality data from financial institutions. For instance, the requirement to obtain Taxpayer Identification Numbers (TINs) for all reportable US account holders will become mandatory for reporting year 2023, and failure to do so will require an explanation as to why it could not be provided. Cross-jurisdictional challenges, the increasing complexity of data privacy rules as well as the often-sensitive nature of personal information of their account holders, can pose significant challenges for financial institutions to obtain the required data.

The changing technical landscape and data requirements mean that financial institutions in the investment industry will need to adapt their data collections and technical capabilities to comply with their FATCA and CRS due diligence and reporting obligations. More than ever, we see fund managers seeking expert advice to help them keep track of the evolving requirements as well as to assist with best-practice implementation. 

3.    Robustness of Policies and Procedures

As part of their onboarding of account holders, financial institutions must now collect all relevant information from their investors via FATCA and CRS self-certification forms. While the format of those forms is not prescribed, they need to capture all necessary data for FATCA and CRS purposes. Accordingly, we help a lot of investment managers with enquiries about the design of their data collection procedures and the robustness of their AEOI governance more generally. 

In addition, potential investors in a fund are more frequently enquiring about their AEOI policies as part of their due diligence and decision-making processes prior to investment. As robust FATCA and CRS policies and procedures become increasingly important for investors, there is an opportunity for investment funds to strengthen their compliance programmes to improve client acquisition and retention.  
In order to have a strong FATCA and CRS compliance regime, financial institutions have to meet ongoing responsibilities in relation to their governance, policies, procedures and internal controls. A good control mechanism surrounding AEOI can also signal to investors that the fund is a safe investment option. 

Conclusion 

So, have the AEOI regimes lost their shine? The answer is not a simple one. 

According to a recent study by Simone and Stomberg (August 2023) in the Oxford Review of Economic Policy, there has been a declining trend in tax evasion through tax haven accounts since the introduction of FATCA and CRS.  But there is still room for improvement. 

In particular, the two regimes do not fit together seamlessly since the US is not party to the CRS. This has led to gaps that can be exploited by taxpayers, such as the US being used by non-US citizens to deposit assets to minimise their tax liability. Furthermore, the AEOI regimes have come with ever-increasing compliance costs for fund managers. Mandatory nil reporting obligations, more onerous data collection and technical requirements as well as an expectation to design and maintain a strong AEOI compliance regime, can all pose challenges. On the positive side, robust AEOI procedures can also increase investor confidence, enhance tax transparency, and encourage investments. 

To conclude, FATCA and CRS may no longer be new, but the AEOI regimes continue to be relevant for an increasing population of investment fund managers, with constantly evolving rules requiring close monitoring and an evolving approach to compliance in turn. 

How Can A&M Help

At Alvarez & Marsal (A&M) Tax, we can fully support your business with meeting your regulatory, compliance and reporting requirements in relation to FATCA and CRS. We are an independent tax group with offices in the US, Latin America and EMEA providing tailored tax advice to clients and investors across a broad range of industries.  We are part of A&M, a leading professional services firm with more than 8,000 advisors in 35 countries and are free of audit independence restrictions. 

Our FATCA and CRS offering includes:

• FATCA and CRS Entity Classifications: We can carry out a classification exercise of the entities in the investment fund structure on a one-off basis or produce a policy document classifying all entities. We can also prepare the self-certification forms and IRS forms to be provided to your counterparties. 
• Self-Certification Forms: We can assist you with the design and review of your self-certification forms to comply with the relevant legislation.
• Investor and product due diligence: We can review the reportability of investors and products and perform a reasonableness check of the classifications assigned to your investors against the AML/KYC documents you hold. 
• Registration: We can help you to register your reporting financial institutions on the IRS portal to obtain a GIIN and perform any local registration or notification requirements, if necessary.
• Health checks and training: We can offer you on-site health checks of your AEOI compliance, policies and procedures and provide you with relevant training sessions for your staff. 
• Reporting: We have capabilities to submit FATCA and CRS reports in multiple jurisdictions by converting the necessary information to be reported into XML format, which we will validate to check it is compliant with the requirements of the respective jurisdiction. We also engage in ongoing communication with regulators to ensure a swift resolution of any follow up queries.

For any questions please contact Darja Routledge.