What are the rules about?
Both FATCA and CRS created a set of rules about due diligence and reporting. Fortunately, the rules for the two regimes are virtually the same, as CRS was modelled on FATCA.
The starting point is that these rules apply to Financial Institution (FIs), and FIs are responsible for conducting due diligence on all accounts they provide. FIs are then responsible for reporting certain accounts to HMRC for onward transmission to their counterpart tax authorities in other jurisdictions.
There are four different types of FI.
- Depository Institution
- Specified Insurance Company
- Custodial Institution
- Investment Entity
The first three are fairly self-explanatory and are all entities that we would recognise as financial services product providers of one kind or another.
The fourth type, Investment Entity, is more complicated, and some trusts and charities can inadvertently fall into this category even though they do not really provide ‘accounts’ of any kind. We will come back to this later.
Due diligence
In terms of which accounts must be reviewed, it is any account maintained for a specific and identifiable account holder.
Beyond that, the due diligence rules are split two ways – ‘new’ accounts and ‘pre-existing’ accounts, ‘individual’ accounts and ‘entity’ accounts.
Entity accounts are those held by legal structures such as trusts, limited companies and charities. Individual accounts are those held by ‘natural persons’. This includes joint accounts.
There are slight differences in terms of how the due diligence is conducted, but they are both concerned primarily with identifying the country of residence for tax purposes of the account holder.
New accounts are those that were set up after the rules came into force in that country. Pre-existing accounts were those that were already open.
For new individual accounts, the FI will require the account holder to complete a self-certification.
A self-certification can take any guise (and is often woven into application forms), but it must include the following information – name, residential address, date of birth, all countries of residence for tax purposes, and Tax Identification Numbers (TINs) for all countries of residence for tax purposes.
For new entity accounts, the FI must identify first whether the entity itself is deemed to be tax resident in a reportable jurisdiction. If so, the account will be reportable.
It must also identify if the entity falls into a classification called Passive Non-Financial Entity (PNFE).
There are various different entity classifications, which is one of the areas where the rules get very complicated. We will not go into all of that here, but the PNFE classification is probably the most significant.
In terms of what a PNFE is, it is almost a default classification. If an entity account holder is not an FI in its own right (see later) and is not an Active NFE (that is, an entity whose income is derived mainly from the trade of goods and services), it will be a PNFE.
