The Impetus to a General Tax Transparency: FATCA, CRS and DAC Reporting Programs


Living in a globalized and interconnected economy, the offshore tax evasion is a real challenge for jurisdictions all over the world. Tax administrations cooperate to fight against it and to protect the integrity of tax systems. While the U.S. implemented the Foreign Account Tax Compliance Act (“FATCA”), the OECD (The Organization for Economic Cooperation and Development) promoted the AEOI (the “Automatic Exchange Of Information”) in July 2014. There are already two important exchange of information systems in place, followed by the Directive on Administrative Cooperation in the European Union.

What is FATCA?

“The Foreign Account Tax Compliance Act is an important development in US effort to combat tax evasion by US persons holding investments in offshore accounts.” It was enacted in 2010 as part of the Hiring Incentives to Restore Employment Act. Due to the complexity of this act, its application has been pushed back to July 1, 2014.

The FATCA requires individuals to report their financial accounts (at least $50,000) held outside of the United States, and also requires foreign financial institutions to report to the Internal Revue Service (“IRS”) information related to financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

FACTA created intergovernmental agreements (“IGAs”) that would allow foreign governments to collect the information from their institutions to pass along to the IRS.

They are two models of IGAs:

The Model 1 IGA requires the foreign financial institutions (FFIs) to report all FATCA related information to their own governmental agencies. Those will perform a data quality check on the data and then submit consolidated information to the IRS. Such agreements have been concluded between the IRS and France, Germany, Italy, Spain, and the UK in July 2012.

The Model 2 IGA requires the FFIs to report all FATCA related information directly to the IRS.

What is the AEOI?

In Parallel, the OECD promoted the Declaration on Automatic Exchange of Information in Tax Matters in May 2014. The so-called AEOI was endorsed by all 34-member countries along with several nonmember countries. In total, more than 65 jurisdictions publicly committed to implementation. Early adopters have committed to a specific and ambitious timetable leading to the first automatic information exchanges in 2017. The others signatories are expected to follow in 2018.

It requires financial institutions to report information on accounts held by non-resident individuals and entities, including trusts and foundations, to their tax administration using the Common Reporting Standard (“CRS”). The tax administration then securely transmits the information to the account holders’ countries of residence on an annual basis.

How do FATCA and the OECD Regulation interact?

The CRS is closely modeled to the Model 1 IGA that many jurisdictions will use for implementing the FATCA. However, the CRS is not simply a straightforward extension.

One of the major distinctions is that the CRS is based upon tax residence. Unlike FATCA, it does not refer to citizenship. Additionally, all bank accounts are considered reportable without any limit regarding the amount, unlike FATCA, which forgives tax liability on smaller accounts (less than $50,000).

Toward a European FATCA: the DAC revision

One of the benefits of the EU internal market is that EU citizens and businesses have the ability to move, act and invest across national borders. Since direct taxation is not harmonized within the EU, that freedom may mean that some taxpayers manage to evade or avoid taxes in their home country. The tax authorities of the EU have therefore agreed to cooperate more closely in order to fight against fraud and tax evasion. The main legislative instrument, the DAC, in this context is Directive 2011/16/EU, concerning administrative cooperation in the tax area. It provides that Member States shall exchange information automatically of the following five categories of income and capital: earnings from work, compensation counselors, life insurance products not covered by other directives, pension and real property and income from such property.

Inspired by the CRS, the European Commission proposed to amend the current DAC to expand the scope of automatic exchange of information in the EU beyond the provisions of the rules currently in force in this regard and cover all types of income. The revision of the DAC should occur in 2017. Thus, in the future, some countries could be subject to different reporting obligations. For instance, Luxembourg financial institutions might be subject to 3 different reporting obligations:

  1. FATCA for U.S. clients,
  2. The OECD AEOI for clients resident in a participating country other than the U.S. or an E.U. Member State,
  3. The revised DAC for clients resident in the E.U.

The fight against tax evasion has just begun.


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Fordham Journal of Corporate & Financial Law