FATCA, CDOT and LATAM cross-border requirements

July 28, 2016 Steve Sprague

The global focus on curbing tax fraud is shifting into high gear, as reporting deadlines under the Organization for Economic Co-operation’s new Common Reporting Standard draw nearer. What started within individual countries to maximize tax revenues within their own borders has grown into regional - and now global - alliances to share information that will cut down on fraud at both the corporate and individual levels.


Three separate requirements, in particular, are paving the way for a more comprehensive global initiative set to take effect next year: FATCA, CDOT and FEI.

Foreign Account Tax Compliance Act (FATCA)
Announced in 2010, the United States’ FATCA launched the global conversation surrounding international tax reporting. The law requires foreign financial institutions to collect and report data associated with U.S. citizens and business entities with significant U.S. ownership in order to curb tax evasion by shifting income abroad. The regulation presents significant hurdles to affected organizations, as they are required to collect and transmit data like never before. Distinctions in local jurisdictions – such as deadlines and data formats – add an extra layer of complexity to FATCA compliance.

Non-compliance with FATCA comes with a hefty price tag – a penalty equal to 30% of all U.S.-sourced gross proceeds revenue. Somewhat unique in tax compliance legislation, FATCA also requires a designated “Responsible Officer” who can face jail time for inaccurate withholdings and reports.

Crown Dependencies and Overseas Territories (CDOT)
Drawing on FATCA as a model, the U.K. introduced mandated CDOT reporting with a similar purpose and requirements. However, it only applies to financial institutions that operate in any of the 10 covered U.K. jurisdictions. Unlike FATCA, CDOT will eventually be folded into the global Common Reporting Standards, meaning that it is more in line with these global requirements than FATCA in order to minimize the transition required.

LATAM’s Factura Electrónica Internacional (FEI)
A new agreement among Argentina, Brazil and Mexico is the first foray into regional cooperation in Latin America. Under an agreement in partnership with the Inter-American Center of Tax Administrations, these three countries are standardizing certain reporting processes to ease cross-border data sharing. Called the Factura Electrónica Internacional, enterprises operating in these countries will shift toward a set of standardized fields, and each country will have a unified view of transactions. Currently in a pilot phase, this agreement is expected to expand to other LATAM countries as well, including Chile, Ecuador, Peru, Colombia and Uruguay.


Common Reporting Standard (CRS)
These three agreements provided the groundwork for a large-scale, global initiative to combat tax corruption. The Organization for Economic Co-operation (OECD) has created the Common Reporting Standard (CRS) guidelines in order to facilitate the exchange of account information between countries throughout the world. Unlike FATCA and CDOT though, this initiative is led by a collective organization – not a legislative body. This means that local jurisdictions have the ability and authority to make individualized customizations, making CRS extremely complicated to navigate. Also known as the Automatic Exchange of Information for Tax Matters (AEOI), CRS will begin rolling out next year. Currently, 94 countries have agreed to participate, including Argentina, Colombia and Mexico in the first adoption wave (2017), and Brazil, Chile, Costa Rica and Uruguay in the second wave (2018).

Immediate Implications
For companies doing business in Latin America, these increasing complexities won’t come as a surprise. This region has long been a leader in government visibility into corporate transactions. The most immediate reporting deadline for companies operating in Latin America is Mexico’s required integration of the foreign trade complemento (Complemento de Comercio Exterior) within the export CFDI messages. The deadline for this integration has been extended until January 1, 2017, to allow exporters to make the necessary changes to their billing systems in order to maintain compliance. This extension only applies to the integration/transmission, however; companies are still required to use the new standardized reporting format starting this year. Ultimately, Mexico’s changes are designed to standardize required CFDI within the global framework to make it more efficient in the automatic exchange of information.

Collectively, these requirements and global cooperation initiatives represent an increasingly complex and ever-changing corporate compliance environment. Organizations must begin looking at compliance beyond the local level – it is a global issue that can have significant ramifications on business performance. Contact us to discuss your compliance strategy today.

 

 

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