No one likes forms ….. especially tax forms.

Since the United States introduced the Foreign Account Tax Compliance Act (“FATCA”) into the world, FATCA forms have become ubiquitous among private funds; GPs are required to request them for non-US fund vehicles and investors are required to complete them. Once the can was opened, the worms started to escape. Now it is common to see not just a FATCA form but also a “UK FATCA” or “CDOT” form in many subscription document packs. This form, for the uninitiated, relates to the automatic exchange of tax information agreements entered into between the UK and its Crown Dependencies and Overseas Territories (most importantly, Cayman, Jersey and Guernsey).

The theory behind automatic exchanges of information is that the vast quantity of taxpayer information that is collected is then exchanged between the relevant tax authorities. For FATCA purposes, the exchange is currently either one-way or two-way, depending on the jurisdiction, and for UK FATCA purposes, the exchange is currently two-way between both Jersey and Guernsey and the UK, but only one-way between the Cayman Islands and the UK. The information exchanged is intended to enable local tax authorities to determine whether its residents have taxable overseas income or gains that are not being reported. FATCA has teeth behind it in the form of a 30% withholding tax, whereas UK FATCA has the threat of relatively low-level monetary fines.

The “beauty” with UK FATCA is that it is based on FATCA. Once a person grasps FATCA, including its complications and definitions, then getting a handle on UK FATCA is much easier. But this beauty is only skin deep – too much familiarity with FATCA can lull one into a false sense of security toward UK FATCA. FATCA and UK FATCA are not exact replicas. For example, a US entity cannot be a passive NFFE (non-financial foreign entity) for FATCA purposes but can be a passive NFE (non-financial entity, which is UK FATCA’s equivalent) for UK FATCA purposes. This can give rise to some head-scratching on the part of investors when completing UK FATCA forms as it’s not simply a case of transposing answers from the FATCA form to the UK FATCA form. It also means that an IRS W-8 form is not itself sufficient for UK FATCA.

UK FATCA forms have been around for about a year and many investors have completed at least one; however, more change is coming. UK FATCA forms will be phased out and OECD Automatic Exchange of Information Common Reporting Standard (“CRS”) forms will be phased in. The Q&A below serves as a warning that new tax forms will start appearing in the coming months and aims to equip readers with enough information to spot a CRS form and understand its purpose.

What Is the CRS?

Under the CRS, financial institutions in participating countries will be required, as under FACTA, to collect and report annually ļ¬nancial account information in respect of investments controlled by reportable accountholders in other participating countries. As with FATCA, reports need to be made about both individuals and entities and there is a requirement to look through passive entities to the individuals who ultimately control such entities (referred to as controlling persons). These reports need to be made to the Financial Institution’s local tax authority (or authorities, if dual resident) who will exchange this information with the relevant participating tax authorities around the world.

Which Countries Are Participating?

An extensive list of countries have signed up to automatic exchange of information. At the time of writing, c. 100 countries have done so, including all EU member states, many of the Caribbean islands, Russia, China and Canada.

Notable exceptions are the United States, Middle East and most of Africa. The United States has stated that it intends to move towards mutual exchange of information using its network of intergovernmental agreements entered into for FATCA purposes.

What Information Needs to Be Collected/Exchanged?

Fairly anodyne information such as name, address, tax identification number(s), date and place of birth are required (as applicable). All relevant jurisdictions of residence are also required together with details of the account holder’s account, including the account number, account balance and any investment income (including dividends, interest, income from certain insurance contracts and “similar” income) and proceeds from sales of financial assets.

When Does Information Exchange Begin?

For 58 countries, information regarding the year ending 31 December 2016 needs to be exchanged by September 2017. For the remaining countries, information for the year ending December 31, 2017 needs to be exchanged by September 2018.

How Does This Affect the Private Equity Industry?

Funds resident in participating countries will need to collect information from investors and make reports. A sponsor with funds across a number of different jurisdictions may need to collect slightly different information for each jurisdiction as there may be slight variances in the definitions in each jurisdiction’s implementation of the CRS.

The slightly wider remit of the CRS compared to FATCA means that some funds may be caught by CRS that are not caught by FATCA; this is not only a geographic question but also a definitional one. For example, it is possible that listed funds may be within the CRS whereas certain listed funds fall outside of FATCA.

For investors the effect will be the requirement to complete an additional tax form; as with FATCA/UK FATCA it may take a while for an industry practice to develop regarding the format of the form, and therefore each form may take a significant amount of time to complete.

How Does CRS Differ From FATCA?

The most striking difference is that there is no withholding tax backing up the CRS.

More subtly, the CRS is somewhat broader in scope than FATCA; the need to make it of general application means that many of the definitions are more generic and therefore catch more people. For example, FATCA is based on taxation on the basis of citizenship whereas the CRS is based on residence. The fact that residence is sometimes a nebulous concept leaves scope for residence to be interpreted broadly; for example, one of the indicia regarding residence is where an account holder has its telephone number.

There is some unhelpful guidance from the OECD that suggests that a “senior managing official” in a passive NFE may count as a controlling person and therefore need to be disclosed. This is very different from FATCA, which looks only to beneficial owners, and could mean that the disclosure requirements under CRS far outstrip those under FATCA. Exactly how this guidance will play out in practice is unclear but we are aware of some entities taking it at face value.

If I am Based in the U.S. (Or Another Non-Participating Country) Can I Ignore CRS?

No. The CRS treats investment entities in non-participating jurisdictions as passive NFEs and therefore requires that any financial institution in a participating country look through such entity to its controlling persons. As noted above, this class of reportable person has the potential to be very broad.

Is This the End of FATCA and UK FATCA?

FATCA will remain in the post-CRS world. The UK implementation of CRS will replace UK FATCA as of 1 January, 2016.