Automatic exchange of information (AEOI) for Tax Transparency

Over the years, offshore banking has been considered as the safest method of evading local taxes. Thanks to globalisation and the seamless connectivity between financial institutions, regulatory bodies and other governing authorities, offshore banking have become more transparent, allowing AEOI regimes to gain control over their taxable finances held in offshore banks.

AEOI promotes the exchange of information on income-generating assets between tax authorities in jurisdictions where those assets may be subject to a tax claim.

The key goal of implementing the AEOI regulations is to improve tax compliance around the world and to avoid tax evasions.

What are the Global Standards on Automatic Exchange of Information?

The Common Reporting Standard (CRS) and Foreign Account Tax Compliance Act (FATCA), are the global standards for Automatic Exchange of Information (AEOI) on bank accounts across reporting jurisdictions to prevent offshore tax evasion, is one such globalisation initiative.

To maintain the integrity of their taxation systems, the reporting jurisdictions exchange AEOI reports once a year “automatically”. Banks and other financial institutions are required to communicate information on non-resident customers’ financial accounts with the tax authorities in their countries of business.

These regulations are intended to ensure that taxpayers correctly disclose all income and assets held in offshore accounts on their tax returns. They enable tax authorities to identify individuals who do not correctly disclose all income by comparing information shared by tax authorities to tax returns. Non-disclosure of this nature is referred to as (offshore) tax evasion.

Foreign Account Tax Compliance Act (FATCA)

The Foreign Account Tax Compliance Act (FATCA) is a part of US legislation aimed at preventing and detecting offshore tax evasion by US citizens (US citizens, US tax residents or US legal entities). FATCA went into effect on July 1, 2014.

Foreign governments around the world have agreed to comply with the legislation and have signed FATCA into local law by implementing bilateral agreements called Inter-Governmental Agreements with the United States (IGA).

FATCA makes it easier for the financial institutions in participating nations to exchange information about US citizens. This scheme has been adopted by all major jurisdictions in some form or another. Financial institutions outside of the United States are required to provide the local tax authority with information on each account owned by a US citizen, including the greatest balance on the account in each year and the income and gains earned by the account.

Common Reporting Standard (CRS)

CRS was created to increase global transparency in tax matters. It requires financial institutions (FIs) to identify accounts held directly or indirectly by individuals who are not tax residents in the country where their account is opened.

If the FI is in a CRS Participating Jurisdiction and the person opening the account is a tax resident of another CRS Participating Jurisdiction, the FI will report the account details to their local tax authority.

What is the difference between CRS & FATCA?

FATCA requires financial institutions to identify and report offshore accounts held directly or indirectly by reportable US citizens. CRS involves over 100 countries that require information on their tax citizens to be collected and reported.

The other significant difference between the two is the choosing of a reportable private individual. CRS investigates tax residency, which is generally established by a person’s permanent residence, whereas FATCA investigates tax residency and citizenship, which includes those who do not reside in the United States.

What Financial Institutions should do to comply with FATCA & CRS compliance?

FATCA & CRS compliance regulations insist the global financial institutions to identify customers who have accounts, directly or indirectly, in countries where they are not tax residents. Customers are asked to complete a document known as a ‘self-certificate’ by financial institutions.

Financial institutions are required to submit certain information provided by account holders to their local tax authority, which will forward it to the tax authority of the nation where any reportable persons associated with the account are designated as tax residents.

MG’s approach in implementing CRS & FATCA Reporting solution

MG has been consistently recognised for its exceptional outcomes and services around Regulatory Reporting for the past 20 years. MG’s approach in implementing a common reporting standard solution is meant to maximise operational efficacy by simplifying the process of combining, validating, and enriching data to ensure data integrity and CRS report correctness. We start from Gap analysis, provide advice on implementing the strong data governance framework to rectify all the data related issues and make the data fully compliant with AEOI guidelines.

Pls refer to our CRS Stride – AEOI / HMRC CRS & FATCA Reporting Solution landing page to know more about our product capabilities.

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