FATCA, CRS, and the Wrong Choice of Who to Regulate

Abstract

FATCA and CRS have a major flaw that enables tax evaders to avoid reporting of their offshore financial assets. This noncompliance opportunity stems from the fact that many private entities are classified under FATCA and CRS as “financial institutions” (“FIs”), and as such these entities are required to report their beneficial owners. Where a tax evader holds financial assets through a private entity that he or she owns and manages, it is unlikely that this entity will report its owner to the tax authorities. At the same time, banks and other FIs that maintain the financial accounts of such entities are not required to report these entities’beneficial owners. Therefore, to avoid reporting, tax evaders can simply hold financial assets through private entities that are classified as FIs.This noncompliance opportunity is a result of a wrong choice of who to regulate. The drafters of FATCA and CRS decided to impose obligations on many private entities to report their beneficial owners, instead of imposing these obligations on banks and other FIs that maintain the financial assets of such entities. This policy also results in higher compliance costs for compliant taxpayers, and larger distortions and deadweight loss. Thus, it benefits tax evaders and harms compliant taxpayers. This Article proposes solutions that the U.S. Treasury and the OECD should consider.Building on this analysis, this Article explores a general question of regulatory design: how to choose which group of agents should be required to satisfy a regulatory obligation where that obligation can be imposed on one of two or more alternative groups of agents. When making this decision, the designers of the regulation should consider the cost-effectiveness of compliance, the potential distortions, and the likelihood of noncompliance for each of the alternative groups.

Controlled foreign companies of Russian residents in the context of world trends

“…The subjects of FATCA regulation are foreign organizations of the financial market, which are responsible for informing the US Internal Revenue Service about the accounts of US taxpayers. In case of failure to comply with this requirement, their activities are subject to taxation at the rate of 30 percent of the turnover on correspondent accounts opened with US banks, which virtually makes operation of such organizations in the US impossible without fulfilling the FATCA requirements (Noked, 2018b;Tsepova, 2019: 45).…”

Exchange of Information in Tax Matters

“…Therefore, the effectiveness and evaluation of automatic exchange have raised several new issues and research over the last few years to find reasons and opportunities to improve the effects of automatic exchange of information (Baker & Murphy, 2021;Janský & Prats, 2015, Meinzer, 2019). An interesting analysis by Noked (2018) addresses FATCA and CRS non-compliance opportunities which arise from classifying private entities as financial institutions, unlikely to report its owners to tax authorities, and not falling under banks' and other financial institutions' obligations to report their beneficial owners. Another piece of research included a series of interviews with government officials in eight countries on collecting and using information, as well as the strengths and weaknesses of automatic exchange of information.…”

A Comparative Study of Business-to-Government Information Sharing Arrangements for Tax Reporting

“…Prior assessment of the important needs for AEOI standard [17,18,19] Challenges and benefits of AEOI standard [20,21,22,23,24] Evaluation of the Common Reporting Standard (CRS) [5,25,26,27,28,29,30] Evaluation of the AEOI standard and its implications [31,32,33,34] Implementation of AEOI standard within National Laws [12,13,14,15,16] AEOI standard and privacy issues [5,35,36] From the technological point of view, the CRS from AEOI standard can be seen as a standardization effort taking place on the data level, including the use of XML schema and the use of generic data definition [11,26,37]. Developing the Information sharing infrastructure that enabling the CRS reporting is still challenging [5] due to, for example, different IT maturity, inexperience dealing with the standard, unawareness about required reporting processes as well as the ambiguity of risks, costs, and benefits.…”