Background and Implementation
In 2010, the United States implemented FATCA, which mandated financial institutions to provide the IRS with information about their U.S. account holders. In 2014, the OECD created CRS based on FATCA principles.
The UAE introduced the UAE CRS in 2015, applying to all UAE jurisdictions, including financial free zones like the DIFC. DIFC subsequently enacted the DIFC CRS through DIFC Law No. 02 of 2018 and Common Reporting Standard Regulation 2020.
The UAE also entered into a FATCA Inter-Governmental Agreement (IGA) with the U.S. on June 17, 2015.
Foreign Account Tax Compliance Act (FATCA) vs. Common Reporting Standards (CRS)
The Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) are international tax agreements aiming to combat tax evasion by requiring financial institutions to disclose information about their foreign account holders to their respective tax authorities.
Applicable in all UAE jurisdictions, including the Dubai International Financial Centre (DIFC), FATCA compels non-US financial institutions (aka Foreign Financial Institutions – FFI) to identify and report US individuals holding assets abroad to the IRS. On the other hand, CRS, an OECD initiative, promotes the automatic exchange of information (AEOI) by requiring financial institutions in participating jurisdictions to identify and report reportable accounts.
The key distinction lies in the agreement’s nature: FATCA is a unilateral pact between the United States and other nations. In contrast CRS is a multilateral agreement among OECD member countries. As a result, FATCA targets exclusively US account holders, while CRS encompasses all signatory nations.
Due Diligence Requirements under CRS AND FATCA
FATCA requires certain US taxpayers holding financial assets outside the country to report those assets to the Internal Revenue Service (IRS). FATCA also requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial ownership interest.
Financial institutions need to collect specific self-certifications covering the CRS required information in order to identify and report account holder’s resident in any of the 100+ jurisdictions participating in CRS. The due diligence procedures in the CRS are designed to identify reportable accounts, understood as those of residents in a jurisdiction that is a reportable jurisdiction at the time the due diligence procedures are performed.
The CRS Regulations, effective from July 30, 2020, outline comprehensive due diligence requirements for individuals and entities, covering pre-existing and new accounts. This includes general due diligence requirements as well as specific criteria for each account type.
Information Reporting Obligations for RFIs
Reporting Financial Institutions must collect and report the following information for each Reportable Account to the UAE Competent Authority:
- Individual reportable persons: name, address, jurisdiction(s) of residence, TIN(s), date and place of birth.
- Entity reportable persons: name, address, jurisdiction(s) of residence, TIN(s), date and place of birth of one or more Controlling Persons identified through due diligence procedures.
- Account Number.
- Name and Identification Number of the Reporting Financial Institution.
- Account balance or value at the end of the relevant calendar year.
- Any other legally required information.
These records must be retained electronically for six years after reporting.
The UAE Ministry of Finance has launched its FATCA/CRS system for 2022 registration and data reporting and risk self-assessment.
All UAE Reporting Financial Institutions must register at https://fatcacrs.mof.gov.ae and submit data and risk assessment by the domestic reporting deadline of 31 July, 2023.
Penalties for Non-Compliance with CRS
Under the Common Reporting Standard Law, Financial Institutions & Account Holders have certain obligations. If they fail to fulfil these obligations, they may face fines or penalties. Here’s a summary of the fines:
Fines on Reporting Financial Institutions:
- Opening an Account without Valid Self-Certification: $300
- Affirming a False Self-Certification: $7,000
- Failure to Keep Records of Due Diligence Procedures: $2,800
- Failure to Apply Due Diligence Procedures: $7,000
- Failure to Report Required Information: $2,800
- Additional daily fine: $140 (up to a maximum fine of $28,000)
- Incomplete or Inaccurate Reporting:
- Minor non-compliance:
- Fine: $280
- Additional daily fine: $28 (up to a maximum fine of $7,000)
- Significant non-compliance: $70,000
- Minor non-compliance:
Fines on Account Holders or Controlling Persons:
- Providing Inaccurate Self-Certification: $5,500
If penalties remain unpaid for over 30 days or if a financial institution fails to comply with an ordered action for over 30 days, the Relevant Authority may issue further default notices. Each successive notice will impose double the amount of the previous penalties. However, the total penalties for each violation should not exceed $70,000.
Note: A fine will be levied on each of occurrence of a contravention of this Law and shall (if applicable) accumulate separately for each contravention.
In conclusion, FATCA and CRS are important international tax agreements that promote tax transparency and combat tax evasion. Financial institutions and account holders need to comply with the respective obligations and reporting requirements to avoid penalties.