With the rising globalisation of business and financial dealings, tax fraud and tax evasion has become a global problem. The ATO has increased its focus on international tax issues, and key to this approach is the gathering of offshore information and documents. The ATO collects this information in several ways including:
- Accessing information held by Australian entities about offshore dealings.
- Issuing offshore information notices.
- Exchanging information with other jurisdictions under various arrangements such as Automatic Exchange of Information regimes.
These regimes impose obligations on businesses such as financial institutions, who are responsible for ensuring compliance.
Automatic Exchange of Information (AEOI) regimes
AEOI regimes concern the automatic exchange of financial account information with foreign jurisdictions. These regimes include:
- Foreign Account Tax Compliance Act (FATCA) – in the case of exchange by Australia with the United States.
- Common Reporting Standard (CRS) – in the case of exchange by Australia with other countries that have implemented the Standard.
Foreign Account Tax Compliance Act (FATCA)
Introduced in 2010, FATCA is designed to reduce tax evasion by U.S. citizens and businesses who use offshore accounts to evade their domestic tax obligations.
In 2014, Australia and the U.S. signed an agreement to improve international tax compliance and to implement FATCA (FATCA Agreement). Australia’s obligations under the FATCA Agreement are outlined in the Tax Laws Amendment (Implementation of the FATCA Agreement) Act 2014.
FATCA obligations are imposed on Australian financial institutions (AFIs) through the operation of Subdivision 396-A of Schedule 1 to the Taxation Administration Act 1953.
Common Reporting Standard (CRS)
The CRS, endorsed by the G20 in 2014, is the mechanism for automatic exchange of tax information between multiple countries. Over 100 jurisdictions (including Australia) have committed to its implementation to date.
The CRS is largely based on the FATCA approach; it is designed to reduce offshore tax evasion by citizens and businesses of countries that implement the standard.
CRS obligations are imposed on AFIs through the operation of Subdivision 396-C of Schedule 1 to the Taxation Administration Act 1953.
A differing approach
Despite the similarities, differences exist between FATCA and CRS, such as the legal bases for the automatic exchange of information. These include Australia’s bilateral tax treaties and the Convention on Mutual Administrative Assistance in Tax Matters (the Convention). The Convention is a multilateral agreement to facilitate international cooperation among tax authorities.
Automatic exchange under the Convention requires an administrative agreement between the ATO and other countries’ tax authorities. In 2015, Australia signed an agreement which facilitates the implementation of the CRS on a multilateral basis with over 100 jurisdictions.
The CRS has also been described as taking a “wider approach” to recording the jurisdictions in which a person is a tax resident, due to the expectation that over time more jurisdictions will commit to its implementation.
How does CRS affect institutions who have FATCA obligations?
A business may need to make separate reports to the ATO for FATCA and CRS depending on their obligations.
CRS does not alter FATCA obligations, but a registered financial institution’s CRS practices may require adjustment to activities previously designed solely for FATCA.
Key takeaways
Automatic Exchange of Information (AEOI) regimes are key methods by which the ATO gathers offshore information to assist with international tax investigations.
Businesses, particularly financial institutions, need to understand their obligations under the Common Reporting Standard (CRS) and/or the Foreign Account Tax Compliance Act (FATCA) as applicable, to ensure compliance.
