How to prepare for FATCA and CRS inspection in reporting financial institutions (RFI)

CRS inspection

Inspections of the performance of CRS obligations in an RFI are carried out by the NRA Head pursuant to the provisions of Chapter 9, Section III of the Act on Exchange of Tax Information with Other States. Pursuant to a secondary regulation, the Head of the First Mazowiecki Tax Office in Warsaw is authorized to carry out such inspections around the country.

In the course of such inspection, the authority may verify whether the inspected RFI fulfils the obligations regarding due diligence and reporting procedures (first of all the obligation to provide information on reportable accounts not documented in CRS-1 form), recording activities included in due diligence procedures and collecting documentation required under these procedures, in particular statements of tax residence provided by account owners and inspectors.

Due diligence procedures depend on who is the account owner and what type of account it is (procedures applicable to new accounts differ from those applicable to the existing ones) and include the collection of tax residence statements from tax owners, database search and additional verification measures if any doubts arise regarding tax residence.

The obligation to record measures undertaken by a financial institution (which does not exist under FATCA) requires special attention. The current regulations do not provide for a detailed form of such a record; therefore, financial institutions have certain freedom in designing it.  Regardless of the form selected, the record should include date, type and description of each activity. The recording process may be based on other records, in particular those regarding anti-money laundering and terrorism financing procedures.

Provisions of the Tax Ordinance and the Entrepreneurs Law, in particular the ones regarding notification on the intent to commence a tax inspection and the place thereof to be sent to the inspected entity,  shall apply to CRS inspections. During the inspection, tax authorities may request access to files, accounting records and all sorts of documents related to the subject of inspection, as well as other materials falling in its scope. When requesting such access, the authorities are obliged to pay special attention to the principle of mutual trust between financial institutions and their clients, and any and all requests made in the course of an inspection must include the “Tax Secret” clause.

An inspection report shall be prepared by the inspecting authority, and the inspected financial institution will be able to submit its comments or explanations thereto within 14 days.  Should it fail to do so, it is assumed that the inspected entity has no reservations regarding the inspection findings.

The inspection is completed upon providing the inspected entity with the report that may include information about detected irregularities and set a deadline to eliminate them (from one to six months). An RFI should inform the inspecting authority about the method of eliminating the irregularities or reasons of failing to do so.

FATCA inspection

Under FATCA, the inspection of the performance of obligations by an RFI is commenced as soon as U.S. tax authorities provide information about a material breach of obligations arising from the FATCA Agreement. Therefore, the authorities cannot instigate such inspection without having received a motion from U.S. tax authorities. Neither FATCA itself, nor the FATCA Agreement provide details on what types of breach are deemed “material”. Therefore, this is a discretionary decision of American tax authorities. The Head of First Mazowiecki Tax Office in Warsaw is the body authorized to carry out this type of inspection as well.

The same as CRS, FATCA inspections are regulated by Tax Ordinance provisions regarding tax inspection and its completion.  Please note that unlike in inspections carried out pursuant to Section III of the Act on Exchange of Tax Information, no restrictions regarding the time or disallowing the simultaneous performance of inspection several procedures included in the Entrepreneurs Law occur in the case of FATCA inspections as they are directly excluded therefrom.

Minor negligence

A special procedure is determined both with regard to FATCA and CRS in relation to minor negligence (FATCA) and cases where no inspection is required (CRS). And again, it is left to the discretion of tax authorities to assess the selection of this type of proceedings. For FATCA, no motion from the U.S. authorities is required to trigger the procedures in Poland.

Administrative and penal fiscal sanctions

The Act on Exchange of Tax Information provides for both administrative and penal fiscal sanctions should any breach of CRS reporting principles be identified.

The maximum fine amount is PLN 1 million and may be charged to an RFI that failed to adhere to reporting procedures, due diligence rules, to keep the record of activities or collect documentation, including statements of account owners and evidence in the form of documentation. A failure to eliminate irregularities detected during an inspection within the specified deadline may also be fined.

Further, individuals who, acting on behalf or in the interest of an RFI perpetrate the above breaches may be fined with up to PLN 6.2 million (under the Penal Fiscal Code) and with up to PLN 52,000 for minor negligence.

FATCA does not provide for administrative penalties if negligence is detected in the course of an inspection. Under penal fiscal procedures, though, individuals who fail to perform their obligation to provide information on reportable accounts within the statutory deadline may be fined by a court with up to PLN 6.2 million in 2020 (or even up to PLN 8.3 million if false information was provided).

How to prepare for inspection

Proper preparation for inspection, beginning from verification whether an RFI correctly performs its obligations under FATCA and CRS, should allow reducing the risk of breach identification by tax authorities and of the related administrative and penal fiscal sanctions. While preparing for possible FATCA or CRS inspection, take time and review procedures and filing practices adopted by the organization. Additionally, analyze whether your record of CRS-related activities is up-to-date, available to tax authorities upon request and whether it contains all elements required by the law.

Author:

Alina Buwaj, Senior Consultant, Tax Advisor