[Reproduced from our article published in Singapore Business Review – December 2022]
Tax authorities and legislators all over the globe have been actively working to prevent tax evasion and promote global tax transparency for almost a decade now. As core components of the global financial ecosystem, FATCA (Foreign Account Tax Compliance Act) and CRS (Common Reporting Standard) legislation aim to prevent tax evasion by compelling financial institutions to transmit certain information about certain account holders to their country(s) of tax domicile. Ultimately, their objective is to identify and discourage tax evasion by tax residents of countries using offshore banks and other Financial Accounts.
FATCA and CRS reporting are likely a significant part of your world if you are an investment manager in Singapore since you likely fall inside the scope. However, managers who outsource their regulatory reporting will recognise that although duty may be outsourced, accountability cannot. FATCA and CRS may sometimes seem like a minefield, which is why your interactions with customers always centre on the “need to know” rather than “good to know” components of the law.
The CRS expands upon the FATCA reporting framework to maximise efficiency and decrease costs for adopting countries and their financial institutions. Although the United States has not yet committed to joining CRS, several nations demand compliance with CRS and FATCA.
In March 2022, the OECD launched a public consultation paper on a new global tax transparency framework for crypto-assets and recommended revisions to the Common Reporting Standard (CRS), enabling the automatic exchange of financial account information between nations.
OECD declared that recently we have witnessed a rapid adoption of crypto assets across a broad range of investment and financial activities. Nevertheless, in contrast to conventional financial products, crypto-assets may be transferred and held without the intervention of any intermediary or central administrator with complete visibility of the completed transactions or crypto-asset holdings. As a result, crypto-assets may be deployed to subvert established international tax transparency regimes, like the CRS.
On the basis of the responses to this public consultation, the OECD intends to finalise the rules and comments for the Crypto-Asset Reporting Framework (CARF) and the revised CRS. The OECD will also establish the exchange instruments and technological solutions required to facilitate reporting and exchanges according to the CARF and the revised CRS. The OECD intends to provide a report on the CARF and the revised CRS during the November 2022 meeting of the G20, which will be presided over by Indonesia.
In addition, another proposed significant adjustment pertained to reporting “controlling persons,” distinguishing those having an interest via ownership, control, or as beneficiaries from those with a managerial position, such as top management officials, guardians, and trustees. It seems that tax authorities want to know who owns equity and who does not, so they may “determine whether taxable income or wealth should be assigned to the “controlling person.”
Singapore, being a highly open economy and home to many multinationals, is keeping up with the pace of these developments. For instance, Singapore has already enhanced the penalty for non-registration and non-filing violations under FATCA and the Common Reporting Standard (CRS). A conviction on or after November 16, 2021, will result in a punishment of SGD$5,000 (about US$3,647) and an additional fine of SGD$100 (approximately US$73) each day for a continuing violation.
On the technological spectrum, the greatest obstacle is the inability of outdated systems to acquire the data required to accomplish compliance. To bridge the data gap, labour-intensive human intervention and exception processing are necessary, with the burden growing annually as the number of customers, transactions, and jurisdictions grow.
According to EY, a lack of visible internal controls and monitoring, as well as risk-reduction procedures, is a further process problem: “while many organisations have achieved robust internal controls around anti-money laundering (AML) and “know your customer” (KYC) risk, comparable controls do not yet exist for multiple types of risk associated with FATCA and CRS.
As the global landscape is growing more complex, it is apparent that the reporting requirement will continue to become more stringent. However, a solution that will work for the situation at hand today may not be appropriate for the situation at hand tomorrow.
Businesses unable to adjust to this climate run the danger of incurring financial penalties, suffering reputational harm, and having unhappy customers. Businesses that embrace an agile and transformational attitude, plan for change and adapt their processes, people, and technology appropriately will be in the best position to accomplish compliance in the most efficient and effective manner possible. Financial firms looking to outsource to third party consultants will need to first keep abreast with the guidelines and ask relevant and critical questions to assess their competence, establish regular checkpoints and knowledge retention mechanism and work towards building an in-house FATCA/CRS function in the foreseeable future.
Singapore companies seeking to strengthen their customer tax reporting goal operating model should first assess the horizon and comprehend the scope of their current and future reporting requirements. In the foreseeable future, reporting obligations are not only not going away, but they are also not going to stabilise. There is a long road ahead: the reporting duties will only get more complicated, the number of regimes will only expand, the expense of providing this duty will only rise, and the technology will only become more advanced and difficult to keep up with.
Without a doubt, a great deal of wealth has already been produced, transferred, and held in Singapore. Hence, the growth of CRS is playing catch-up in a climate of significant upheaval and change. As a small nation, we must adapt well and more importantly, groom enough compliance talents capable of navigating the regulatory complexities to safeguard our reputation as a financial hub in the region.