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Foreign Account Tax Compliance Act (FATCA)


Understanding the laws and regulations of FATCA

The global tax structure is being altered as a result of globalisation, rising economies, and more regulation, which is presenting difficult-to-overcome issues for financial institutions located all over the world.


Changes of a fundamental structural nature have been made to both the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) as part of the efforts of the US government to increase worldwide tax compliance.

What exactly is FATCA?

The Foreign Account Tax Compliance Act, also known as FATCA, is a law that was passed to collect information on citizens of the US who avoid taxes in the United States while living abroad.


It requires banks and other foreign institutions ("FIs") located outside of the US to disclose information about their customers who are citizens of the US and hold accounts at those institutions.


The goal of the Foreign Account Tax Compliance Act is to prevent US "Person" taxpayers from evading US taxes through the use of personal accounts held at foreign financial institutions and investment vehicles. In this regard, Malaysia is aiding the United States in implementing the Foreign Account Tax Compliance Act.


What is a US Person?

Definition of a US Person includes the following:

  1. US citizen or nationality, including an individual born in the US who has not given up his/ her US citizenship (maybe a resident in another country)

  2. US resident or green card holder

  3. US passport holder


The Act mandates

financial institutions to:

  • Identify people living in the United States who have financial accounts in other countries, as well as investors from other nations who have investments in the United States;

  • Performing due diligence procedures on customers to determine their FATCA status, covering both individual and entity customers

  • Report on US Individual and Legal Entity's foreign financial assets, including US individuals who exercise control over the Legal Entity; and

  • Impose 30% withholding tax on any US FDAP* source income paid to recalcitrant and NPFI customers.

* U.S FDAP source income examples are annuities, dividends, emoluments, interest, premiums, remunerations, rental, salary, wages, etc.


What precisely is the CRS?

The Common Reporting Standard (CRS), which was developed by the Organization for Economic Co-operation and Development (OECD), is the global reporting standard for the Automated Exchange of Information (AEOI).


Therefore, Common Reporting Standard (CRS) is a new information-gathering and reporting requirement for financial institutions in participating countries/jurisdictions to help fight against tax evasion and protect the integrity of tax systems.


The purpose of the CRS is to provide tax authorities with a more accurate picture of the taxable financial assets held by their residents who are located outside of their home country.

153
.1 Standard for Automatic Exchange of Financial Account Information in Tax Matters - Im
Download 1 STANDARD FOR AUTOMATIC EXCHANGE OF FINANCIAL ACCOUNT INFORMATION IN TAX MATTERS - IM • 3.09MB

153
.2 Common Reporting Standard Status Message XML Schema - User Guide for Tax Administrat
Download 2 COMMON REPORTING STANDARD STATUS MESSAGE XML SCHEMA - USER GUIDE FOR TAX ADMINISTRAT • 2.14MB

153.3 User Guide for Tax Administration
.pdf
Download PDF • 5.03MB

153.4 CRS-related Frequently Asked Questions
.pdf
Download PDF • 948KB

The FATCA and the CRS appear to share some similarities, but there are important distinctions between the two. CRS is substantially broader in scope and requires a united, cross-team effort to assure readiness and compliance.


You are free to go on to the following post now that you have an understanding of what FATCA is:



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