It’s back to business as usual for Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) in terms of the reporting deadlines but there have been some important changes to what you will be filing which come into effect from this year.
The OECD have released a new XML schema (a structure of tags for the identification data and transmission of data electronically and in bulk) and supporting guide for CRS. Organisations must comply with schema v2.0 from 1 January 2021 and if they fail to do so and file using the previous v1.0 schema, their submission will be rejected.
The new XML schema will “reflect the experiences gained from the first exchanges, aim at increasing the user-friendliness and contain the latest technical developments”, meaning that it will aim to significantly improve the quality of the data being provided to and exchanged by tax authorities for CRS.
Little has change in terms of the content being reported between v1.0 and v2.0 of the schema. Each data element to be provided remains as either compulsory ( marked as ‘Validation’), ‘(Optional) Mandatory’, which depends on other data elements or availability of information, or purely ‘Optional’. There is no new mandatory information, but there are some updates to the currencies and countries recognised by the schema.
What this means in practice
There’s no real change to the processes for gathering the data itself. All the changes are ‘under the hood’ in terms of what software needs to do when converting your data to XML. Jurisdictions you submit your reports to will be scanning the XML on submission to see if it is v2.0. This is more than just a label to update in the XML, there are formatting expectations throughout the schema which come with it, so you’ll need to ascertain if your software is up to date and supports the new schema. If you don’t comply with the v2.0 schema, your submission will be rejected.
While there is no new schema for FATCA reporting, the IRS will be taking a closer look at instances where Tax Identification Numbers (TINs) are excluded in reports to determine if financial institutions have taken sufficient steps to comply with FATCA reporting requirements.
TINs are equivalent to an individual’s social security number in the US or national insurance number or unique taxpayer reference in the UK. Previously, the IRS relaxed the mandatory reporting of TINs due to the difficulty in obtaining this information and many jurisdictions accepted FATCA forms with these details omitted. A replacement set of 9 characters (‘000000000’ or ‘AAAAAAAAA’) would usually be required to be reported in the absence of a genuine TIN. TINs can continue to be omitted but from January 2021 the IRS has put forward a number of codes, which can be used in the absence of a TIN, to help the IRS understand why the TIN could not be obtained and the efforts made by the financial authority to do so.
What this means in practice
Financial institutions will need to determine why they have been unable to provide the TIN and could even be asked to evidence the steps they’ve taken to retrieve this information. If you have not had any feedback from the tax authorities about your FATCA reports to date, this could trigger a change. If your reports have previously omitted TINs for reportable accounts, it makes sense to look at the TIN code options provided by the IRS and consider whether these are applicable to any of your accounts. The use of these codes is optional but provides the opportunity to be proactive and report more detail than would have been included in prior year reports and may help prevent questions coming down the line in the future.
If you’re unsure about whether the accounts you are reporting include any unknown TINs, this could be a good opportunity to review your processes to ascertain how well you are reviewing data prior to submission. Consider whether your software can help you validate your data, either at the source in your systems, or in the reports prior to submit.
What should I do now?
File validation at the point of submission is becoming increasingly important to avoid the report being rejected or queried, either of which can add to compliance workloads. Plus, we can expect jurisdiction’s respective submission portals to review their validations as they implement the OECD’s refined schema. So requirements will continue to change, necessitating responsive processes within the business.
You need to ensure your process is robust and versatile enough to help you deal with these changes. We are unlikely to see the extensions meted out last year under the pandemic and reporting is expected to adhere to the usual timeframes, which for many jurisdictions is either May or June 2021. So, action should be taken sooner rather than later to review and assess your processes and the reporting solution you use if the above changes cause you any concern.
The common reporting models are below. Depending on which one you currently use you might want to consider…
- Inhouse team – Can you keep up with the changes made not just to the reporting criteria but also the underlying technical requirements of the schema? Will you need to now dedicate resource to updating any inhouse software? Will you need to retrain staff? Or if you use government-supplied software, is this now proving manually intensive to complete for each jurisdiction?
- Outsourced partner –Do new reporting requirements see your costs rise? Do your joint processes give you oversight and confidence that you are doing all you can to comply?
- Insourced software – Will the software be updated to accommodate the new schema? Does the software support your processes and can it help your personnel review data to ensure compliance with the latest requirements?
Our Alphacat regulatory reporting solution provides you with control over the process while fulfilling the requirements of different jurisdictions using a single data set. Our XML engine has been updated to comply with CRS schema v2.0 and we can help ensure you meet your TIN reporting obligations.