(c) South Africa Institute of Chartered Accountants. Contact SAICA for permission to reproduce this article., Financial Services

Banks vs the client under FATCA and CRS

By Marelize Loftie-Eaton

It is critical for both financial institutions and their clients to treat the requirements of FATCA and the CRS with the respect it commands from a compliance perspective to prevent unnecessary pain with harsh penalties being imposed for non-compliance.

Although tax avoidance is legally possible or acceptable, there is a fine line between tax avoidance and tax evasion. Certain principles were agreed to at a G20 meeting in 2009 wherein it was required to implement more stringent tax-monitoring measures in an attempt to combat offshore tax evasion. In response to the summit, the US was effectively the ‘guinea-pig’ by introducing the Foreign Account Tax Compliance Act (FATCA) that was passed into US law in March 2010. Owing to the potential of other G20 jurisdictions formulating their own version of FATCA, a global standard was introduced by the OECD known as the Common Reporting Standard (CRS).

The intention of FATCA and CRS is to leverage off of anti-money laundering (AML) / know your customer (KYC) and target the global financial industry as the mechanism to identify and report to revenue authorities on persons potentially evading tax due to a failure to disclose accounts/investments held offshore.

So, what are the responsibilities of the financial institution?

In a nutshell, financial institutions (typically being banks, insurance companies, investment entitles and custodial institutions) are required to:

  • Implement customer due diligence procedures to solicit whether a customer holds more than one citizenship, nationality or residency for tax purposes based upon the laws of that jurisdiction – thus the determination is not limited to a single tax residency and should include all tax residencies/obligations/liabilities held both locally and internationally for individuals and entities. This involves requesting a self-certification which is a declaration by the client of his/her/the entity’s tax residency(ies); and specifically, to an entity, the entity’s classification under FATCA and CRS as either a financial institution, active or passive non-financial entity (NFE) and requires additional steps where the entity is a passive NFE.
  • Perform a ‘reasonability test’ of the self-certification received − this is a test to determine if the self-certification provided is true and correct. The intent is to compare the tax residency declared to information collated as part of the on-boarding process (for example KYC information) to determine if there is a conflict in the information that would render the self-certification as unreliable.
  • Perform a remediation exercise on the existing customer base to determine the same.
  • Report customers to SARS who will in turn report the customer to the revenue authority of the jurisdiction concerned.

The above appears simple but is a tricky question to get right given that it is not limited to income tax and ‘what is your tax residency or residency for tax purposes’ doesn’t quite fit the requirement of ‘any tax’ given that financial institutions don’t want to go down the road of performing a tax analysis, and under ordinary circumstances may not give tax advice. Where compliance is not met, the financial institution may be subject to fines under the Tax Administration Act.

Although this places an administrative burden on the financial institution, they are not alone when it comes to being fined. The ordinary person and companies are affected with the responsibility to provide the correct information to a financial institution. Where information is not provided, such a person that fails to provide or refuses to provide information may be reported to SARS as ‘non-compliant’ and may be subject to a fine under the Tax Administration Act.

So, what exactly are the responsibilities of the client?

This obviously differs whether you are an individual or a registered company (legal entity).

Individuals are to certify all jurisdictions within which they have tax liabilities/obligations regardless of whether tax is owed / to be paid or not and provide the tax reference number per jurisdiction where such a number has been issued. A failure to provide a tax reference number will not render you as non-compliant provided that you can state reasons why you don’t have a number – thus if you are only South Africa tax resident, as the submission of a tax return is currently voluntary and is based upon a threshold, you may not be in possession of a tax reference number even though SARS may have issued you with one. What would render you as non-compliant is typically where you fail to confirm your tax residency or refuse to provide the requested information.

Entities are to certify the same re the provision of its tax residency as well as what the company’s classification per its business activities would be under each regime (as this can be different). In addition, the information on the controlling persons of the entity and their tax residency(ies) held may be required in specific cases.

Is domestic law applicable?

Guidance from the CRS commentaries provides that, in general, the domestic laws lay down the conditions under which an individual or entity are to be treated as fiscally resident. An individual/entity will/may be resident for tax purposes if he/she pays or should be paying tax therein by reason of his/her/its domicile, residence, in the case of an entity the place of management or incorporation, or any other criterion of a similar nature, and not only from sources in that jurisdiction. Where an entity that has no residence for tax purposes shall be treated as resident in the jurisdiction in which its place of effective management is situated.

Currently, SARS are looking at amending the regulations to ensure that the collection of the information is mandatory in that an account cannot be opened without the requisite certification of a person’s/entity’s tax residency.

Marelize Loftie-Eaton, a committee member of the SAICA Tax Administration Committee and Head of External Tax Reporting and Tax Administration Risk, FirstRand Group Tax − with a notable contribution by Justine van Wyk, FATCA and CRS specialist, FirstRand Group Tax.