Since their introduction over 10 years ago, the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) have obligated financial institutions (FIs) to report the tax residency and value of their investors’ assets to their country of tax residence. FATCA and CRS compliance is growing in importance as enforcement of the tax transparency regimes increases and penalties are applied.
Jurisdictions like Luxembourg, the Cayman Islands, and the British Virgin Islands (BVI) are strengthening efforts to enforce compliance with FATCA and CRS regulations. They seek to reduce global tax evasion with enhanced transparency standards for financial institutions. These regions implement stricter review processes, onsite inspections, and enforcement measures to meet international tax obligations.
Key Developments in FATCA and CRS Compliance
- Luxembourg
- The Luxembourg tax authorities (Administration des Contributions Directes (ACD) have begun onsite audits of FIs to ensure compliance with FATCA and CRS due diligence and reporting obligations.
- During the audit, the ACD will review policies and procedures, IT systems, and controls pertaining to due diligence and reporting obligations.
- Cayman Islands
- The Department of International Tax Cooperation (DITC) anticipates commencing CRS comprehensive reviews this year, which will be similar to an onsite inspection or audit. When an FI is selected, the Principal Point of Contact (PPoC) will be contacted to provide high-level information.
- Emphasis is placed on data accuracy, especially for Taxpayer Identification Numbers (TINs) and Dates of Birth (DoBs). The DITC will also take note of mismatches between CRS reports and CRS Compliance forms.
- British Virgin Islands (BVI) A three-tier risk rating system ensures frequent reviews for higher-risk FIs, including annual inspections for high-risk entities.
- Effective with the 2024 reporting year, all Reporting and Non-Reporting FIs must complete an annual CRS Compliance form to detail compliance measures. This new form must be completed annually within nine months (i.e., by Sept. 1) from the end of each financial period (Dec. 31) with penalties for late filings.
Risk-Based and Targeted Compliance
All three jurisdictions adopt risk-based strategies to optimize resources and target high-risk institutions. Regulators leverage data analytics to identify discrepancies and gaps, ensuring non-compliant entities face closer scrutiny. This increases the need for FIs to submit accurate information to avoid potential audits.
Penalties and Enforcement
Increased penalties for non-compliance serve as a deterrent. Missing filings or failure to cooperate during inspections may lead to significant fines, emphasizing the importance of timely and accurate reporting. In Luxembourg, entities that do not comply with FATCA and CRS obligations can face local penalties of up to €250,000. The Cayman Islands can impose a penalty of $50,000 per entity per offence. The BVI can charge a penalty of up to $100,000 for failure to comply with CRS obligations.
Preparing for Increased Scrutiny
FIs must adapt to heightened regulatory oversight by:
- Ensure a valid self-certification is on file for all investors and obtain a new one if there is a change in circumstances to any information on the form.
- Updating compliance procedures to align with current FATCA and CRS requirements.
- Ensuring staff are well-trained on compliance obligations.
- Prioritizing data accuracy, particularly for TINs and DoBs.
- Maintaining proactive communication with regulators.
The way forward
Luxembourg, the Cayman Islands, and the BVI are setting new FATCA and CRS compliance benchmarks. Their rigorous frameworks aim to enhance global tax transparency while preserving the integrity of their financial sectors. FIs operating in these regions must strengthen compliance to avoid penalties and contribute to a transparent global financial system.
For additional information about FATCA and CRS compliance, please contact Mo Vandi or a CBIZ tax professional.
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