Each year, tax evasion costs governments an estimated $492 billion globally. To create more financial transparency governments and regulators have implemented policies to ensure individuals and entities disclose their offshore assets and income to tax authorities.
Central to these changes are the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS). These frameworks require financial institutions (FIs) and fund managers to determine, record, and submit information on account holders who may be tax residents in other jurisdictions.
Stakeholders in the alternative investment industry must be aware of their FATCA and CRS compliance obligations. This helps effectively structure funds, onboard investors, and safeguard institutional reputation.
What is FATCA?
FATCA is a United States federal law passed in 2010 as a component of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires foreign financial institutions (FFIs) to report to the Internal Revenue Service (IRS) information about financial accounts held by U.S. taxpayers, or by foreign financial organizations in which U.S. taxpayers hold a substantial interest.
The primary purpose of FATCA is to promote tax compliance and transparency by:
- ・Determining undeclared U.S. taxpayers’ foreign income and assets
- ・Discouraging the use of foreign jurisdictions for tax evasion
- ・Creating an international network of financial transparency via intergovernmental agreements
Key FATCA legislative and implementation milestones
FATCA has undergone key legislative changes since 2010. Below is a timeline of the critical highlights in its global application.
- ・March 18, 2010: FATCA is enacted as part of the HIRE Act
- ・February 15, 2012: U.S. Treasury announces proposed FATCA regulations
- ・January 17, 2013: Revised FATCA regulations were declared in the Federal Register
- ・July 1, 2014: FATCA withholding takes effect on particular U.S.-source payments
- ・October 2, 2015: IRS activates limited reciprocal automatic information exchange under FATCA.
- ・2017: The Complete FATCA reporting model begins globally.
KYC procedures must be finalized prior to onboarding any new customers, as this initial step is critical for verifying identities and assessing potential risks, especially regarding money laundering and terrorist financing. For corporate clients or business entities, it is essential to not only confirm the organization’s details but also to identify the beneficial owners and controlling persons. This comprehensive vetting process is crucial in preventing illicit activities from infiltrating the financial system, ensuring a secure and compliant environment for all transactions.
What is CRS?
CRS is an international regulatory standard for automatic exchange of information (AEoI) between jurisdictions. It was developed by the Organisation for Economic Co-operation and Development (OECD) in 2014 to address offshore tax evasion and promote tax transparency.
CRS builds on the FATCA reporting threshold to improve efficiency and reduce implementation costs for jurisdictions and their FIs. The FIs must determine the tax residence of their respective account holders and disclose particular financial account information to their local tax authorities for exchange with other jurisdictions.
To demonstrate the jurisdictional scope, here’s how five major centers compare in their implementation of both FATCA and CRS.
| Jurisdiction | FATCA Participation | CRS Participation | Local Reporting Portal | Regulatory Authority |
| Cayman Islands | Model 1 IGA | Yes | DITC Portal | Department for International Tax Cooperation |
| British Virgin Islands (BVI) | Model 1B IGA | Yes | BVIFARS | International Tax Authority (ITA) |
| Luxembourg | Model 1 IGA | Yes | MyGuichet.lu | Administration des Contributions Directes (ACD) |
| Singapore | Model 1 IGA | Yes | IRAS myTax Portal | Inland Revenue Authority of Singapore (IRAS) |
| Hong Kong | Model 2 IGA | Yes | AEOI Portal | Inland Revenue Department (IRD) |
FATCA vs. CRS – Key Differences and Similarities
While the two frameworks focus on reducing tax evasion by reporting offshore accounts, they differ in several aspects, including origin, scope, and compliance techniques, among others, as tabulated below.
| Aspect | FATCA | CRS |
| Origin | Enacted by the United States under the HIRE Act (2010) | Developed by the OECD, endorsed by the G20 (2014) |
| Primary Objective | Prevent tax evasion by U.S. persons holding foreign financial assets | Facilitate global tax transparency and prevent cross-border tax evasion |
| Jurisdiction Scope | Unilateral – applies globally but only to foreign FIs with U.S. account holders | Multilateral – adopted by 120+ jurisdictions, including most major financial centers |
| Financial Institutions | Non-U.S. FIs must register with the IRS and report on U.S. accounts | Reporting FIs in CRS-adopting countries report to their local tax authority |
| Information Collected | Account holder name, address, U.S. TIN, account balance, income, gross proceeds | Name, address, tax residency, TIN, account balance, interest, dividends, and sale proceeds |
| Withholding Mechanism | 30% withholding tax on U.S. source income if non-compliant | No withholding, but non-compliance may lead to enforcement actions under local laws |
| Penalties for Non-Compliance | Severe financial penalties and exclusion from U.S. capital markets | Domestic penalties vary by jurisdiction |
| Legal Basis | U.S. federal law (Internal Revenue Code 1471–1474) | OECD Model Competent Authority Agreement and domestic CRS legislation |
Impact on Fund Managers and Financial Institutions
FATCA and CRS have a significant impact on the compliance mechanisms for fund managers and FIs, particularly those with international investor bases. We must incorporate strict due diligence, classification, and reporting aspects through the processes of investor onboarding, fund workflows, and operational systems.
1. Compliance obligations during investor onboarding
Investor onboarding now includes gathering comprehensive information on tax residency and citizenship. Under FATCA, FIs are required to identify U.S. persons through IRS forms, such as the W-8/W-9 or through valid self-certifications that meet the required standards.
CRS directs self-certification of tax residency across over 120 jurisdictions. Lack of compliance or omitted documentation can lead to a withholding obligation, deferred subscription, or prompt a regulatory investigation.
2. Entity classification and due diligence
Funds, special purpose vehicles, and management companies must examine their classifications under FATCA and CRS. Do they qualify as Reporting Financial Institutions or Non-Financial Foreign Entities?
This information guides their due diligence duty towards their respective account holders and investors. Due diligence involves examining pre-existing accounts, applying a reasonableness test, and gathering valid documentation by the OECD and IRS frameworks.
3. Influence on fund structuring and cross-border distribution
FATCA and CRS influence domicile options, distribution mechanisms, and investor targeting approaches. For example, jurisdictions with solid implementation structures, such as Singapore, Luxembourg, and the Cayman Islands, may have clearer compliance avenues.
However, they may require firms to be acquainted with local regulatory frameworks. Therefore, funds must have structures that lower tax risk and administrative load for the vehicle and investor.
4. Investor trust and reputational considerations
Transparency is now a fundamental expectation. Investors are becoming sensitive to fund managers’ tax compliance stance. Non-compliance leads to regulatory penalties, including FATCA’s 30% withholding, and ruins reputation and investor confidence. Therefore, fund Managers and FIs should display strong compliance procedures to remain competitive.
Compliance and Reporting Best Practices
Complying with FATCA and CRS requirements go beyond filing reports. Fund managers and FIs need to develop sustainable, auditable, and investor-focused systems.
Here are some FATCA and CRS reporting best practices:
1. Documentation and data collection
A solid compliance strategy starts with precise investor documentation. FATCA’s forms W-8 and W-9 certify U.S or non-U.S. status. CRS self-certification of tax residency has to be reviewed based on KYC data. Invalid or missing documentation can cause account termination or attract withholding penalties.
2. Reporting timelines and format
FATCA mandates that reports be filed annually with the IRS or local tax authorities, ordinarily by March 31 or later, depending on jurisdiction. CRS reports are filed within the same annual cycle, typically by June or July. The report formats vary per jurisdiction, but they usually follow the OECD XML schema.
3. Role of RegTech in automating compliance
Regulatory technology platforms help manage the intricacy of diverse jurisdictional compliance. For instance, a platform like RAISE automatically validates data and document collection and generates XML reports per FATCA and CRS requirements. This eliminates manual efforts, boosts accuracy, and ensures audit aptness.
4. Internal controls and audit-readiness
Transparent internal policies, periodic staff training, and an audit pathway prove compliance. Therefore, firms should have evidence of performed due diligence, updated or review logs, and solid investor documentation. To augment control, independent reviews or external audits are handy defences in the event of a tax authority inquiry.
How Linnovate Partners Supports FATCA/CRS Compliance
Meeting FATCA and CRS demands requires sound regulatory expertise, solid controls, and adaptable technology. Linnovate Partners delivers all these, helping fund managers and FIs meet international tax compliance demands efficiently.
We incorporate FATCA and CRS requirements directly into the investor onboarding process. We use automated procedures, vigorous due diligence, investor self-certifications, and accurate classification.
This ensures, required documentation, such as the W8/W9 forms and CRS certification forms, is promptly gathered and authenticated, avoiding compliance gaps and manual amendments.
Automated reporting through the RAISE platform
RAISE, Linnovate’s proprietary RegTech platform, completes the FATCA and CRS reporting lifecycle. It automates data clustering, adheres to jurisdiction-specific requirements, and generates authenticated XML files ready for submission to the IRS or local authorities. Additionally, RAISE provides error tracking, audit logs, and dashboard reporting to improve real-time visibility and control.
Trusted by global alternative managers
Linnovate Partners is a credible provider for alternative investment managers across primary financial hubs. With a solid focus on regulatory compliance and fund reporting, Linnovate amalgamates sound expertise with technology to simplify FATCA and CRS demands.
Linnovates’ experience has been recognised in various industry awards, including:
- ・Best Fund Administrator in Hong Kong and Singapore
- ・FinTech Innovation in Asset Management in Singapore
- ・Silver Stevie® Award for Compliance Solution Category (U.S.)
Currently, Linnovate administers over 800 funds, serves more than 10,000 users, and supports over USD 140 billion in assets and investment portfolios. Moreover, its strategic USD 40M commitment by SeaTown Private Capital in 2024 augments its continuous expansion and innovation in regtech.
Navigate Global Tax Transparency With Proactive FATCA and CRS Compliance
Given the dynamic international investment sphere, understanding and adhering to FATCA and CRS are regulatory imperatives. Both structures are pivotal to the global pressure for tax transparency.
By collaborating with expert compliance specialists like Linnovate Partners, you align with the changing regulatory demands, reduce risks, and preserve investor trust. From onboarding to reporting, Linnovates’ mix of competence and automation ensures that FATCA and CRS demands are accurately and efficiently met.
