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May 12, 2016

In 2010, the Internal Revenue Service (IRS) introduced the Foreign Account Tax Compliance Act (FATCA) to prevent US citizens from avoiding taxes by using financial accounts in foreign countries. On similar lines, in 2014, the Organization for Economic Co-operation and Development (OECD) proposed the Common Reporting Standard (CRS) to combat problems of off-shore tax evasion by foreign citizens and companies.

An obvious question that comes to mind is, arent both these regulations serving the same purpose? Then why burden financial institutions with both? The fact of the matter is, these two regulations appear to be the same, but are not quite. Despite the common intent, and some similar characteristics, FATCA and CRS are notably different at a granular level and cannot substitute for one another.

Lets dig a little deeper.

FATCA and CRS: A Comparison

In our conversations with leading financial institutions the world over, we are led to believe that firms view FATCA as an enabler for CRS implementation since both standards involve extensive regulatory reporting, but CRS covers a wider jurisdiction. Reporting processes under CRS and FATCA need to be managed with the utmost caution since the slightest of mistakes may result in fiascos.

Both these regulations have some common requirements, such as compulsory reporting of account balances, submission of reports to the local tax authority in exchange for similar information about financial accounts in foreign countries, and aggregation of accounts for individuals and entities for reporting purposes. However, there are some fundamental differences as well. For instance, with regard to standardization of terms, concepts, and approaches, FATCA Model 1 IGA provides the scope for negotiations but CRS does not. Another point worth noting is that under CRS, the tax residency defines the reportable status of individuals or entities, whereas FATCA focuses on citizenship and/or residency. Further, FATCA has more complex classifications of entities as compared to those under CRS.

So, should only one rule or should both ?

Okay, so weve established that these apparently similar regulations differ from each other in many aspects. We know that FATCA aims to combat tax evasion by US persons. But tax evasion is a global concern, isnt it? This was the reason CRS was introduced. In a manner of speaking, FATCA seems to have catalyzed the birth of CRS. Just like FATCA facilitates the exchange of information between the US and other countries, CRS does it between non-US countries. So for the time being, both these regulations are here to stay. In the future though, you cannot deny the possibility of them merging into a single global instrument to check tax evasion, applicable to individuals and entities alike.

What does CRS compliance spell for existing business processes and IT systems?

The wider scope of CRS means that a huge volume of financial firms come under its umbrella, and this warrants a sea change in firms reporting processes and back-end IT systems. Upgrading these elements to make an organizations compliance framework CRS-ready is a mammoth task. We believe, that to make existing systems CRS compliant, the FATCA-centric capabilities will be crucial. Whether these are present or not, and how mature they are, will determine the implementation complexities and cost challenges organizations are likely to face while deploying CRS-related systems.

Moreover, since most organizations need to have a well-thought-out strategy to meet all applicable requirements. As some processes, like customer due diligence, are time-consuming, it would be wise to outsource them to third parties can focus on core business activities.

The financial regulatory landscape is as dynamic as the industry it regulates, maybe a tad more. So financial institutions need to look at the bigger picture and ensure scalability of their IT systems and processes to accommodate any future amendments to existing regulations, or the introduction of new ones. To ensure comprehensive and hassle-free compliance to evolving regulations, financial firms need to foster collaboration between various teams such as finance, operations, IT, legal, and taxation. By future-proofing existing systems and processes, financial institutions would be better placed to comply with these regulations, ensuring minimum disruption to systems, processes, and people.

Jyoti is a Functional Consultant with the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). A qualified Chartered Accountant from the Institute of Chartered Accountants of India (ICAI), she has over nine years of experience in the IT industry, most of it being in the BFS and capital markets space. She provides consulting services for financial and regulatory reporting with regard to IFRS, FATCA, CRS, and FINREP, and is responsible for the conceptualization of finance transformation programs for TCS leading clients.


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