With taxing authorities around the world gearing up to resume operations at pre-COVID levels, a few jurisdictions have announced their intent to increase enforcement of regulations requiring the automatic exchange of information (AEOI) likely in hopes of raising revenue.
Non-U.S. banks, broker/dealers, investment managers and other FIs required to comply with AEOI provisions, such as the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS), should therefore be mindful of several new developments in various jurisdictions that may result in additional risk and increased exposure this year.
FATCA generally requires reporting of financial accounts held by US persons to the US government, while CRS is the global standard for the automatic exchange of financial account information between participating jurisdictions. Many jurisdictions, including Canada, Bermuda, the United States and the Cayman Islands, have recently announced their intention to increase enforcement of these provisions through various means, including examinations, this year. Below is a summary of key developments for each jurisdiction.
The Canadian Revenue Authority (CRA) has announced that it will commence examinations of Canadian FI’s compliance with FATCA and CRS this year and will impose administrative penalties for noncompliance starting Jan. 1, 2022. The CRA indicated that during the exams, it will focus specifically on whether financial institutions have timely collected self-certification forms from investors and shareholders during onboarding (when accounts were opened) certifying their FATCA/CRS status and residency as required to establish whether they are reportable. Canada published revised self-certification forms for entities and individuals in December 2021, which are available at the following link. If FIs do not comply with CRA’s due diligence requirements, noncompliant FIs may be subject to penalties of $2,500 per form and, in some instances, these penalties may be significant or material to financial statements.
The CRA has indicated that it may provide discretionary penalty relief for FIs depending on their remediation efforts and will consider, for example, whether the FI has implemented “strong measures” [WG1] [TP2] to ensure that valid self-certifications are obtained, which may include freezing or closing accounts. It is therefore imperative that FI’s domiciled in Canada implement processes and controls requiring timely collection, validation/review, and storage of Canada’s self-certification forms from investors.
Besides new self-certification forms, CRA also issued an updated xml schema[WG3] [TP4] , to be used for filing information returns in 2022. More specifically, on January 21, 2021, CRA issued xml schema version 1-21-4, for reporting information under the FATCA and CRS regimes. As Canada increases its enforcement efforts, it is likely that automated tools for improved data analytics of xml files will likely be utilized to evaluate future filings by FIs.
On Jan. 22, 2022, the US Internal Revenue Service issued a reminder to FIs that responsible officer certifications documenting their organizations’ compliance with FATCA are due by July 1, 2022 for the FATCA certification period ending Dec. 31, 2021. The certifications are generally due every three years and are only required for FIs in jurisdictions (such as Switzerland or Bermuda) that have Model 2 intergovernmental agreements (IGAs) in effect and for FIs in jurisdictions that have no IGA with the U.S. government for implementation of FATCA.
FIs that fail to submit required RO certifications timely will not be in compliance with their FATCA obligations and may be subject to revocation of the entity’s global intermediary identification number and subject to 30% withholding on US sourced FATCA withholdable payments it receives. For more details, please refer to our prior alert.
In February 2022, the Cayman Islands International Department of Cooperation posted a bulletin with new guidance encouraging FIs to carefully review and update their FATCA and CRS classifications as needed. The bulletin advised that DITC is currently matching FATCA and CRS notification data in its portal against other data sources, such as the IRS global intermediary identification number (GIIN) registration list, CIMA licenses and registrations, Economic Substance notifications (ESNs) and Cayman’s General Registry nature of business classifications. The DITC has indicated that where discrepancies and misclassifications are discovered and FIs fail to notify the DITC of their correct classification under the regulations, the DITC will consider appropriate compliance and enforcement action.
Cayman has already began issuing notices to FIs domiciled in Cayman Islands that registered on the IRS’ portal last year, but failed to register on Cayman’s portal, for example, asking them to confirm their status and to register on the DITC portal if required. It is therefore imperative for FI’s to review and confirm their classifications and registration status now to avoid the risk of noncompliance.
In Cayman’s most recently issued guidance, there were also a number of other important updates. First, Cayman announced that its DITC portal now has the functionality to deactivate FIs where the entity has ceased to exist or is otherwise no longer a Cayman Reporting FI. Cayman has also published an updated list of reportable jurisdictions, adding Jamaica, Kenya and Morocco to its list of reportable jurisdictions and removing Kuwait for 2021 reports.
Finally, in guidance issued Oct. 19, 2021 related to the 2021 reporting period, Cayman clarified that Cayman Reporting FIs are generally required to report account holder TINs and birth dates on CRS Reports or the FI may be subject to administrative penalties. Additionally, DITC specified that where no date of birth has been provided for a pre-existing account, the FI should expect further inquiries by the Tax Information Authority. This clarification of requirements suggests that going forward, Cayman intends to hold FIs accountable for filing more accurate and complete returns and that they intend to enforce these requirements.
Bermuda FIs should also be mindful of increased enforcement efforts. New this year, Bermuda FIs are now required to file a CRS Compliance Form and may be subject to CRS Reviews by Bermuda’s taxing authority going forward. The Bermuda Ministry of Finance released a Notice of Upcoming CRS Compliance Activities announcing the addition of an Annual CRS Compliance Certification Form (the CRS Compliance Form) to the Bermuda Tax Information Reporting Portal. The purpose of the form is for FIs to certify their compliance with CRS regulations. The form must be completed annually on the portal by all Bermuda reporting financial institutions (RFIs) and Trustee-Documented Trusts (TDTs) starting with the 2020 reporting period. The form for the period ending Dec. 31, 2020 was due on Jan. 15, 2022. In future periods, the CRS Compliance Form must be submitted no later than Sept. 30th following the end of the reporting period.
In the same notice, Bermuda announced that it will begin issuing notices requiring certain Bermuda reporting FIs to undertake a CRS Independent Compliance Review (CRS Review). Bermuda published Guidance for these CRS Reviews late last year. According to this guidance, the Ministry will use a risk-based approach to identify a subset of Bermuda RFIs that are required to engage an approved independent reviewer to perform a CRS Review. The guidance indicates that the registered Primary User for the Bermuda RFI will receive a Notice to Undertake a CRS Independent Compliance Review via email.
Banks, funds and other FIs domiciled in Canada, Cayman Islands and Bermuda should ensure that they have adequate systems, processes, and controls for complying with FATCA and CRS as well as other evolving information reporting requirements. While many may have implemented compliance programs when these rules were introduced several years ago, FIs should review their entity classifications and begin testing the operating and design effectiveness of their controls now to ensure that they are compliant and to remediate any potential gaps that may not withstand the scrutiny of examinations or inquiries by taxing authorities going forward. Perhaps not surprisingly, many FIs are now looking to technology to help improve efficiency, manage risks, and enhance reporting required under these provisions. As examinations commence, be sure that your organization is prepared as the landscape continues to evolve.