Operational taxes update: FATCA & CRS, QI and Investment Income Reporting
Tax Alert - July 2020
By Troy Andrews and Vicky Yen
FATCA & CRS
As part of their COVID-19 response, Inland Revenue has recently extended the 2020 Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) reporting deadline from 30 June 2020 to 30 September 2020. This gives reporting entities additional time to not only complete 2020 reporting, but also potentially investigate and remediate any issues. This opportunity is being taken by many financial institutions as Inland Revenue moves into its “assurance” phase with audit activity. This year is a critical year as what you report could have a bearing on whether you might be an early audit candidate. We discuss this further below.
Do you have FATCA & CRS reporting obligations?
As a reminder, the FATCA and CRS regimes were introduced to improve cross-border tax compliance. They require “Financial Institutions” to conduct due diligence on their account holders and to report certain information about the US/non-resident account holders to relevant tax authorities.
Our September 2019 article highlighted scenarios where FATCA and CRS have commonly been overlooked. A key takeaway is that under FATCA and CRS, “Financial Institutions” encompass not only entities such as banks and custodians (which fall under the “traditional” definition of a financial institution), but also in some cases, partnerships, trusts, and corporate trustees.
For example, a family trust may be deemed to be a Financial Institution if it has investments in financial assets (e.g. shares and bank deposits) and has a discretionary investment management service provider (such as a wealth advisor or bank) that has discretion over its investments.
Another common misconception is that FATCA is only applicable if there are US account holders. This a false assumption, as entities may still be required to register for FATCA and conduct the necessary due diligence procedures even where they do not have any US customers.
What are Inland Revenue’s focus areas?
The first formal step in Inland Revenue’s audit activity was to send a questionnaire to large financial institutions. This included a number of risk based questions such as:
- Various questions on internal controls, policies, procedures and data transmission – and whether these were ready for Inland Revenue to examine;
- What testing or review has been undertaken;
- What control deficiencies and remediation actions were taken;
- Whether an independent / external advisor reviewed your programme;
- Is management reporting to the directors on compliance of CRS; and
- Circumvention / avoidance questions.
These questions have served as a useful reminder for financial institutions of the level of maturity that Inland Revenue expects. These are not “set and forget” programmes.
We expect a similar focus from Inland Revenue in relation to the next phase of specific audit activity. The challenge often comes down to making sure that there is a clear, "auditable" paper trail. Getting to the right answer for reporting is often not enough to be compliant with the rules. For example, not all financial institutions will have built a policy for a simple “record keeping requirement” like making sure that you have "discoverable" failed account openings. It might be time to review your policies with a fresh set of eyes to ensure you are not just reporting everything you need to, but are also ready for audit.
A particular issue that is relevant for the reporting of accounts for the year ending 31 March 2020, is that this is the end of the window that financial institutions had to “obtain missing TINs” (a TIN is a US taxpayer identification number; the equivalent of an IRD number). We also understand that the US Internal Revenue Service (IRS) has started to escalate its enforcement processes if financial institutions have missing TINs. Unfortunately, if a TIN is not included in a financial institution’s reporting, but the other information still is – which is required - then the lack of this information is difficult to hide from. For FATCA, the IRS activity might start the process of potentially revoking GIINs (Global Intermediary Identification Number). This takes 18 months from notification of non-compliance and highlights a real economic cost (as FATCA withholding could be suffered on any US sourced income). For financial institutions that are reporting on all recalcitrant accounts, this could seem like an unfair consequence of non-compliance.
A “Qualified Intermediary” (QI) is an entity that acts as an agent for another person such as a custodian, broker or nominee. A non-US intermediary may enter into an agreement with the IRS to obtain QI status. Key benefits of having QI status include being able to provide non-US clients who receive US sourced income a reduced US withholding rate, and also not having to disclose confidential client information to upstream US custodians or to the IRS. See our September 2019 article for more information.
There has been a dramatic uptake in becoming a QI in New Zealand and Australia, following the threat of a FATCA withholding tax being imposed (30% on proceeds). While the IRS then removed the FATCA withholding tax, interest in becoming a QI has been maintained as there is a significant benefit in accessing the treaty tax rates (rather than much higher US domestic rates). The continued interest in obtaining QI status has also been fuelled by US withholding agents or custodians only agreeing to deal with QIs; meaning that a New Zealand custodian wanting to offer US investments to its clients might not have much of a choice (unless they go through another QI custodian).
Those with QI status should keep in mind that in addition to annual reporting to the IRS, a QI must have a compliance programme and make certifications to the IRS every three years which include the results of an independent review. The IRS has recently announced an extension until 15 December 2020, for those who were due to complete their periodic review by 1 July 2020 (or request a waiver).
Investment income reporting
Investment income reporting has become mandatory for payments of investment income from 1 April 2020. Key changes to note include:
- A higher penal 45% RWT withholding rate on interest applies from 1 April 2020 for taxpayers who have not provided their IRD number.
- RWT and NRWT withholding certificates no longer need to be provided to investors who have provided their IRD number.
- Nil returns for RWT and NRWT are now not required to be filed if there is no investment income to report, which in practice can have time bar issues.
- Company dividends statements are no longer required to be provided to Inland Revenue.
The net of all of the above, is that the compliance obligations in this area are complex and the consequences of getting it wrong can be severe. If you would like to talk about your obligations and getting assurance that nothing is falling through the gaps please contact your usual Deloitte advisor.
July 2020 Tax Alert contents
- Operational taxes update: FATCA & CRS, QI and Investment Income Reporting