FATCA and the Common Reporting

Standard: A Comparison
by Richard LeVine (Special Counsel), Aaron Schumacher (Partner) and Shudan Zhou
(Associate), Withers Bergman LLP.

This article provides a comparison between FATCA and the Common Reporting Standard.
It was first published in the Journal of International Taxation: IFA Madrid 2016 special
edition and is republished with the Journal's permission.
This article was first published in the Journal of International Taxation: IFA Madrid 2016
special edition and is republished with the Journal's permission.

Introduction
On the heels of a milestone in the implementation of the Foreign Account Tax Compliance
(FATCA) provisions in the U.S. law "Hiring Incentives to Restore Employment Act of
2010" ("HIRE Act"), the United States' receipt of automatically exchanged information
from certain partner countries in late 2015 (in IRS News Release IR-2015-111, issued on
October 2, 2015, the Service announced the "exchange of financial account information
with certain foreign tax administrations", meeting the "key milestone" that the first
exchange take place by September 30, 2015). FATCA's sister law - the OECD's Common
Reporting Standard (CRS) (see PwC, "OECD Publishes Long Anticipated Commentary on
Common Reporting Standard", 25 JOIT 38 (November 2014)) witnessed its own first
milestone. As of January 1, 2016, certain financial asset information then in existence
became CRS-relevant for "Early Adopter" countries and is expected to be exchanged
among these jurisdictions automatically in September 2017 (as of October 30, 2015, 96
jurisdictions were committed to becoming CRS signatories 56 "Early Adopters"
committed to the first exchange in 2017 and 40 "Late Adopters" committed to first
exchange in 2018. A complete list of these jurisdictions is at
www.oecd.org/tax/automatic-exchange/commitment-and-monitoring-process/AEOI-
commitments.pdf). In September 2018, "Late Adopters" will exchange similar information
in existence as of January 1, 2017 (there is some confusion whether the Late Adopters
will be reporting only 2017 information or both 2016 and 2017 information when they
make their first reports in 2018). Notably, the United States is not a CRS signatory and
has not indicated that it will become one in the foreseeable future.
Arguably more significant than FATCA due to its global reach and multilateral nature, CRS
is modeled on FATCA in terms of legislative philosophy and methodology, but certain
significant structural and mechanical differences may result in the two laws working very
differently. CRS's unique policy focus may cause the next compliance tsunami to hit the
global asset management fiduciary industry. In addition, the United States, as a non-
signatory to the CRS, receives certain unique, favorable treatment (as discussed below,
CRS exempts the U.S., a non-CRS signatory, from recharacterizing financial institutions as
nonfinancial entities. Such recharacterization rule was designed to prevent the use of
non-signatory jurisdictions to circumvent CRS reporting obligations. The U.S. is the only
non-signatory jurisdiction that receives the exemption), which, combined with some
features of FATCA, raises a valid question of whether the U.S. is becoming the big black
hole in the global transparency network that it pioneered in building. This article offers
some observations from a practitioner's point of view and seeks to add to the ongoing
discussions about FATCA and CRS legislation and implementation.
Different uses of similar information to accomplish
similar goals
Very broadly, to combat tax evasion, FATCA looks at all types of entities to identify U.S.
taxpayers' "financial assets" held in "financial accounts" outside the United States, and
CRS uses similar rules for CRS signatories to identify their taxpayers' "financial assets"
held in "financial accounts" outside their home countries. "Financial asset" and "financial
account" may be misnomers. These terms do not refer simply to bankable assets or
accounts with regulated financial institutions; rather, they are defined broadly under
both FATCA and CRS to include a wide range of interests, such as equity interests in
partnerships and corporations and beneficial interest in trusts. Essentially, the goal of
FATCA and CRS is to identify virtually all extraterritorial assets other than active business
assets to build a factual basis to uncover tax fraud and tax evasion.

Despite their similar stated purposes of collecting taxpayer information to combat tax
evasion, the United States and the CRS signatories likely will have to rely on different
domestic legal infrastructures to use the information. The U.S. is the only industrialized
country that imposes taxation on its citizens' worldwide income even if they reside
abroad (the United States also taxes lawful permanent residents (green card holders) on
worldwide income regardless of their residence). For this reason, the United States has
long requested information about assets held outside its territories and has enacted
robust mechanisms for collecting information and assessing penalties based on
nonreporting of offshore assets and income. Information collected under FATCA informs
the IRS of U.S. taxpayers' non-U.S. assets, directly relevant to the U.S. worldwide taxation
regime and directly linked to the U.S.'s domestic reporting system (for instance, the
United States is able to cross-match FATCA information with information collected
through the domestic informational reporting system (e.g., IRS Form 114 (FBARs), 8938,
5471, 3520, 3520-A) on an automated basis. Given the massive amount of information
that the U.S. receives under FATCA, such automated cross-matching is perhaps one of the
viable ways to realistically make use of the information. Presumably, mismatches in
information collected through these two different means may alert the IRS to potential
tax fraud or tax evasion and form a factual basis for building audit or prosecution cases.).

By contrast, a fair amount of CRS signatories have territorial tax systems and generally
do not tax their tax residents on their foreign income; most of the CRS signatories do not
tax their nonresident citizens on their worldwide income. How CRS signatories use CRS
information to connect with their respective domestic reporting and taxation regimes
may raise interesting questions. One way for CRS signatories to use the information to
combat tax evasion may be to request assistance from other signatories to seize tax
residents' overseas assets identified through CRS to satisfy domestic tax liabilities. This
in turn may beg the question of whether there is an effective global foreign tax judgment
enforcement mechanism in place, a topic that this article discusses briefly.
FATCA and CRS: similarities and differences

FATCA is a fundamentally bilateral regime. The United States enters into bilateral Model
1 intergovernmental agreements (IGAs) (very broadly, entities subject to a Model 1 IGA
would first report relevant reportable information to the Model 1 IGA jurisdiction, which
would then report the required information to the IRS. As of the publication of this article,
98 jurisdictions have entered into or have committed to entering into Model 1 IGAs with
the United States) or Model 2 IGAs (broadly, entities subject to a Model 2 IGA would
report the relevant reportable information to the IRS directly. As of the publication of this
article, 14 jurisdictions have entered into or have committed to entering into Model 2
IGAs with the United States) with each of its partner countries and they exchange
information bilaterally. Exhibit 1 shows the bilateral structure of the regime, the
hierarchy of FATCA authorities, and the flow of information under different IGA models.

CRS is a mix of bilateral and multilateral regimes, and dozens if not hundreds of IGAs
among CRS signatories are expected in the years to come. The CRS legal framework
consists mostly of three building blocks - the CRS ("Standard"), the Model Competent
Authority Agreement (MCAA), and the "legal basis" for exchange. The Standard, though
not a binding law, is roughly equivalent to the U.S. FATCA Regulations in that it provides
the biggest amount of the due diligence and reporting rules under the CRS framework.
The MCAA is roughly equivalent to a FATCA IGA in that it "links" the Standard and the
"legal basis" for exchange and provides the modalities of the exchange to ensure the
appropriate flows of the information (there are three types of MCAA - a multilateral
MCAA, a reciprocal bilateral MCAA, and a nonreciprocal bilateral MCAA. Over two-thirds
of the current (committed) CRS signatories have chosen the multilateral version). The
legal basis is an existing legal instrument with treaty status that authorizes automatic
exchange of information (for a more detailed explanation of the legal and operational
basis for exchange of information under CRS, see paragraph 11 of the Introduction to the
Standard for Automatic Exchange of Financial Account Information in Tax Matters).

Operationally under CRS, every one of the 96 (as indicated, 96 jurisdictions became or
were committed to becoming CRS signatories as of October 30, 2015. The actual number
could change by the time of publication of this article. For illustration, 96 is used as a
rough indication of the number of jurisdictions involved) countries will need to sign a
Competent Authority Agreement (CAA) based on the MCAA, which will not necessarily
have treaty status. Among other things, such a CAA allows the two (or more for a
multilateral version of the CAA) signatories to find the appropriate "legal basis" to obtain
treaty status for automatic exchange of tax information. The "legal basis" could be an
existing bilateral double tax convention (DTC or bilateral income tax treaty), or, absent a
DTC, an existing bilateral tax information exchange agreement (TIEA), or, absent a DTC
and a TIEA, the Multilateral Convention on Mutual Administrative Assistance in Tax
Matters ("OECD Mutual Assistance Convention"). A DTC, TIEA or the OECD Mutual
Assistance Convention will have treaty status and could activate its respective
information exchange component to "lend" treaty status to the CAA. The "legal basis"
largely determines whether the two signatories' exchange agreement will be bilateral or
multilateral. Exhibit 2 shows the hierarchy of CRS authorities.

Regardless of whether a binding CAA is based on two jurisdictions' existing bilateral DTC
or TIEA or whether the binding CAA subjects the two jurisdictions to a wider multilateral
agreement, the exchange of information itself is always bilateral among all the CRS
signatories (for a more detailed explanation of the legal and operational basis for
exchange of information under CRS, see paragraph 11 of the Introduction to the Standard
for Automatic Exchange of Financial Account Information in Tax Matters). Each pair of
signatories must notify each other before exchange of information begins. Exhibit 3
shows the flow of information among a sample of five jurisdictions, which involves ten
pairs of exchange relationships. Simple math shows that there will be 4,560 pairs of such
exchange relationships among all 96 CRS signatories.

It is a mistake to believe that because CRS is "multilateral" information will automatically

flow to all other CRS signatories once a signatory signs on to it. There is no magic button
that will share one signatory's information among all others overnight. The entry into and
administration of all binding CRS exchange agreements may prove politically difficult and
logistically complicated. This may turn out to be an administrative burden to tax
authorities. Each CRS signatory is free to modify the CAA and domestically implement
CRS obligations under its own laws. The interaction of dozens, if not hundreds, of
agreements and various domestic laws may increase complexity for tax authorities and
taxpayers alike.

Inter-jurisdiction enforcement mechanisms and intra-jurisdiction

"police"

At its launch, FATCA was perhaps best known for threatening to impose a 30%
withholding tax on certain U.S.-source payments for certain nonparticipating persons.
The 30% withholding tax was a necessary "stick" drawing the attention of other
governments, after which one presumes the idea of IGAs was conceived. It was necessary
because the fundamental contradiction inherent in FATCA is that it is imposed on entities
over which the United States does not have jurisdiction, making FATCA arguably the most
aggressive extraterritorial enforcement of one country's tax law in history. However,
when over a hundred countries entered into various IGAs with the U.S. and pledged to
incorporate FATCA into their domestic laws, the real penalty for FATCA violations
became local jurisdictions' civil or criminal sanctions. Local jurisdictions' sanctions are a
more effective law enforcement mechanism than the U.S.'s unilateral 30% withholding
tax and strengthen the entire global FATCA enforcement framework (however, there is
some residue of the 30% withholding tax in certain instances).

That said, for the vast number of nonbank business entities in the world that FATCA is
truly designed to reach to uncover overseas assets held through private structures, the
de facto "police" are the banks and other regulated financial institutions implementing
FATCA. Technically, among other things, every individual or entity with an equity or debt
interest in a non-U.S. entity has an "account" under FATCA that is subject to various due
diligence and reporting obligations. But in reality, if a closely held structure does not have
a bank account at all and does not receive payments from any regulated financial
institutions, all of its due diligence and reporting obligations may exist only in the
abstract. Nonbank business entities would be most incentivized to properly comply with
FATCA when they have bank or financial accounts because the regulated financial
institutions, for their own protection, effectively and tirelessly enforce FATCA by
relentlessly collecting customer information on behalf of the United States.

By contrast, CRS does not involve a withholding tax, as all signatories agree to incorporate
CRS provisions into their domestic laws. The real penalty for ensuring entities' CRS
compliance is each jurisdiction's domestic sanction. A question may be what ensures CRS
signatories' compliance? Though the 30% FATCA withholding tax is imposed on entities
for noncompliance, the U.S. can conceivably use it to make sure that its partner countries
honor their IGA obligations. The OECD does not have "sticks" like the 30% FATCA
withholding tax to make sure that all CRS signatories honor their treaty obligations. It
remains to be seen what will happen if certain CRS signatories go "rogue" or, perhaps
worse, become disinterested.

Who will act as the police in CRS enforcement within each CRS signatory remains
uncertain. Doubtless, the regulated financial institutions can and will police CRS
enforcement as they would for FATCA. However, there could be other policing agents.
There is more at stake for most of the CRS signatories than for U.S.'s partner countries
under FATCA because it is much more likely for one CRS signatory to receive reciprocal
information from another CRS signatory than for a FATCA partner country to receive
information from the United States, as discussed below. Thus, a committed CRS signatory
that is in a position to leverage more domestic resources to police entities in its own
jurisdiction may be able and incentivized to use more enforcement mechanisms than
simply relying on banks to police their customers. As discussed below, CRS signatories
may have an opportunity to use asset management fiduciaries/professionals, along with
banks, to police CRS enforcement on its behalf. A lot remains to be seen as legislation and
enforcement unfold.

Comparison of certain key rules

The Standard for Automatic Exchange of Financial Information in Tax Matters

Implementation Handbook ("Implementation Handbook") provides a comparison of key
differences between FATCA and CRS rules (Implementation Handbook, para. 240). This
comparison also offers valuable insights into the legislative intent behind the differences.
The authors of this article have some interesting observations from the practitioner's
point of view. Reasonable minds may differ with our views, which, however, may serve
as the basis for a helpful discussion.

Streamlined compliance options under CRS

FATCA and CRS classify entities similarly but provide different compliance options for
the same entity classifications. CRS's approach arguably is an improvement over FATCA's.

Both CRS and FATCA rely on similar standards to divide all relevant entities into three
major categories - financial institutions (FIs) (technically, there is one important
difference between FATCA's and CRS's definitions of "investment entity" one category of
FI ("IE FI"), although the difference can be negligible for purposes of this article. The U.S.
FATCA Regulations require an IE FI to meet a two-prong test, both the "managed by" test
and the "gross income" test. Most Model 1 IGAs initially dropped the "gross income" test
and then provide, in their domestic guidance notes, the flexibility of a choice between a
one-prong and two-prong test. Thus, with certain fact patterns, advantage can be taken
of rule-arbitrage opportunities depending on whether an FI or NFE status would be more
suitable to the taxpayer. By contrast, CRS adopts the two-prong approach of the FATCA
Regulations. Here, we disagree with the drafters of the Implementation

Handbook in their statement (para. 240) that "the Standard was designed to achieve an
equivalent outcome to that achieved through the Model 1 FATCA IGA. Jurisdictions should
therefore be able to rely on the approach in the Standard for purposes of both the
Standard and the Model 1 FATCA IGA". We advise taxpayers subject to both FATCA and
CRS to conduct an independent analysis regarding the IE FI definition under FATCA and
CRS separately and not to rely on the conclusion under one set of rules for purposes of
the other set.) passive nonfinancial entities (NFEs), and active NFEs - and each category
has its own due diligence and reporting obligations. The divergence lies in each of the
category's compliance options. FATCA offers several compliance options for an FI (such
options include registered deemed-compliant FI, certified deemed-compliant sponsored,
closely held investment vehicle, and sponsored investment entity) which are based on
the FI's specific substantive attributes. Indeed, this variety of compliance options results
in 31 boxes in Line 5, Part I, of IRS Form W 8-BEN-E. But operationally, all of these
compliance options under FATCA can, in form, be grouped effectively into two types: (1)
Direct Reporting and (2) Sponsored. CRS adopts this form-based approach to offer two
compliance options - Direct Reporting and Sponsored (para. 240 of the Implementation
Handbook further explains this policy decision). The CRS's form-based approach may be
an improvement over FATCA because, compared with CRS, FATCA's attribute-based
approach does not seem to translate the different substantive attributes into significantly
different types or scopes of information reported or a different manner for reporting the
information. The CRS's form-based approach seems to accomplish the same task while
simplifying the procedures.

"Controlling person" questions

The differences between FATCA and CRS over "controlling person" questions illustrate
the two regimes' different policy focuses. This may have important implications as to how
the rules of the two regimes may be implemented differently.
FATCA consistently seeks to identify U.S. taxpayers' beneficial ownership in non-U.S.
passive assets, the idea being that tax liabilities are attached to income derived from
ownership. Thus, the concept of "controlling person" was not part of the original FATCA
architecture - it is not in the FATCA Regulations and is not reflected in the current IRS-
required due diligence or reporting forms or procedures. FATCA looks for the "specified
U.S. person" for non-U.S. FIs and the "substantial U.S. owner" for passive NFEs, both
ownership-based concepts (a "specified U.S. person" of a non-US FI is essentially a U.S.
taxpayer who has equity or debt interest in certain non-U.S. assets. A "substantial U.S.
owner" of a passive NFE has a 10% ownership). The concept of "controlling person" was
added to IGAs and was borrowed from the Financial Action Task Force (FATF)
recommendations of 2012 (as the FATF is designed to combat money laundering rather
than tax evasion, the concept of "controlling person" is inherently focused on control and
not just ownership).

This control-focused concept, applicable to passive NFEs, seems to be most relevant to

trusts and similar legal arrangements, and generally covers fiduciaries such as trustees,
protectors, and any natural person with "ultimate effective control" over the relevant
entities (see, e.g., the definition of "controlling person" in the U.S.-U.K. IGA, which is a
standard definition among IGAs: "[T]he term 'Controlling Persons' means the natural
persons who exercise control over an entity. In the case of a trust, such term means the
settlor, the trustees, the protector (if any), the beneficiaries or class of beneficiaries, and
any other natural person exercising ultimate effective control over the trust, and in the
case of a legal arrangement other than a trust, such term means persons in equivalent or
similar positions. The term 'Controlling Persons' shall be interpreted in a manner
consistent with the Recommendations of the Financial Action Task Force".). A controlling
person is not treated as an accountholder under FATCA. In reality, it appears the effect of
adding the concept to FATCA is to render certain U.S. fiduciaries' information accessible
to local IGA jurisdictions and make certain otherwise nonreportable accounts reportable
to IGA jurisdictions (the addition of "controlling person" in IGAs made an otherwise
nonreportable account reportable by modifying the definition of "U.S. Reportable
Account" as in the U.S.-U.K. IGA: "[T]he term 'U.S. Reportable Account' means a Financial
Account maintained by a Reporting United Kingdom Financial Institution and held by one
or more Specified U.S. Persons or by a Non-U.S. Entity with one or more Controlling
Persons that is a Specified U.S. Person". In reality, questions about "controlling persons"
would likely be asked only on bank due diligence forms designed by local jurisdictions;
these questions are not asked in IRS-designed or required forms. From the U.S.
perspective, reporting is ownership-based so even when certain otherwise
nonreportable accounts (nonreportable because of lack of U.S. ownership) are made
reportable because of the "controlling person" concept, the U.S. still does not require
these persons with mere control and without ownership to be reported to the United
States. Thus, it appears that the net effect of adding the "controlling person" concept to
FATCA is to allow local IGA jurisdictions to obtain this information.). The United States
still does not seem to be particularly interested in the identity of these fiduciaries, as
evidenced by how the U.S. designs its own due diligence forms and reporting forms and
procedures.

Intended or not, the way that CRS rules work shows a clear policy focus on control, apart
from ownership (for an excellent discussion of CRS's policy focus on control apart from
ownership, see Noseda, "Trusts Under Threat", The Step Journal (September 2015). Noseda
attributes the CRS's focus on control to European countries' suspicions towards trusts;
we would take this one step further and boldly conjecture that the focus may be a clear
policy decision to be followed by implementation measures different from FATCA. Or at
least CRS signatories would have the liberty to take such different and arguably more
effective enforcement measures even if it was not originally intended.). CRS inherits the
"controlling person" concept from FATCA IGAs, which are in turn a departure from the
FATCA framework. CRS rules effectively blur the lines between controlling persons and
beneficial owners. In defining "equity interest" for a trust, a key definition for
determining accountholder, CRS includes settlor, beneficiaries, and "any other natural
person exercising ultimate effective control over the trust" (section VIII(C)(4) of the
Standard). Consistent with other provisions under CRS, natural persons with ultimate
effective control over a trust generally refer to trust fiduciaries, i.e., the controlling
persons in the case of passive NFEs. Thus, for FIs, CRS effectively views trust fiduciaries
(who otherwise would be controlling persons if the underlying entity was classified as a
passive NFE) as accountholders, and puts trust fiduciaries in the same basket with actual
beneficial owners like settlors and beneficiaries. (Indeed, there emerges a belief in the
European legal community that CRS belongs more properly to the anti-money laundering
regime rather than the tax law regime, whereas FATCA is always part of the U.S. tax law
regime. For anti-money laundering law purposes, "control" is perhaps as important as
"beneficial ownership," if not even more so.)

Further evidence of CRS's policy focus on control is that CRS rules require the entire value
of underlying assets to be disclosed in association with trust fiduciaries that administer
such assets, whereas FATCA does not have this requirement. Unlike FATCA, which does
not (1) equate controlling person with accountholder, (2) require the disclosure of
controlling persons in association with the value of the underlying assets, or (3) have a
mechanism to link the two together definitively, CRS rules require trust fiduciaries to be
disclosed in association with all of the assets for which they provide fiduciary service (see
Implementation Handbook Tables 7 and 8). Professional trust fiduciaries could be
disclosed as being associated with billions or even tens of billions of dollars, making them
very visible on the CRS radar screen and obvious subsequent scrutiny targets (for
example, a trust fiduciary serves on 50 different trusts and the aggregate value of the 50
trusts' assets is $10 billion, the settlors are deceased and not disclosable, and each of the
beneficiaries of the 50 trusts may each have a reportable amount of $1 million or less
(equivalent to the distributions they receive in a certain year). What the tax authorities
will see is the fiduciary being linked to $10 billion and several small beneficiaries. As a
matter of law enforcement's scale of economy and efficacy, it would not be a surprise if
the tax authorities focused their resources on going after the fiduciary as an efficient and
effective way to ensure that all 50 trusts would report properly, serving the ultimate goal
of ensuring that all asset owners will pay taxes properly.).
Despite FATCA's focus on ownership and CRS's on control, FATCA and CRS share one
stated purpose - to combat tax evasion. This begs the question of how CRS signatories will
use information in relation to trust fiduciaries or why they appear to be exceptionally
interested in this information. It is possible that CRS signatories will view trust fiduciaries
(i.e., asset managers) as effective vehicles for ensuring the asset owners' tax compliance.
This further evidences the CRS drafters' belief that tax evasion is often made possible by
fiduciary structures (such as trusts, foundations, and Stiftungs). As between asset owners
and asset managers, CRS seems to have made a clear policy decision to have professional
asset managers "on the hook" which may prove to be a more effective enforcement
technique. If our speculation has any merit, perhaps the next compliance tsunami will hit
the global fiduciary industry. They will be forced to join the banks in policing the
enforcement of CRS or else they themselves may be penalized. Or worse, the tsunami may
have widespread spillover effects in other areas of the law - once the government obtains
otherwise confidential taxpayer or fiduciary information, there is no constraint over what
the government may do with the information. Some practitioners predict that this global
transparency movement may increase cross-border litigation in areas unrelated to tax or
anti-money laundering.

FI's treatment

FATCA exempts accounts held by non-U.S. FIs from being reported by other non-U.S. FIs.
The policy reason is that non-U.S. FIs are not U.S. taxpayers but have their own obligations
to report to the United States any U.S. ownership of accounts in the FIs. The United States
obtains the information that it seeks and does not lose any relevant information by
offering this exemption. However, if an accountholder is a U.S. FI, it is reportable as
specified U.S. person. Such a U.S. FI has its domestic tax reporting obligations in the United
States. Thus, by obtaining information about the same entity via domestic reporting and
FATCA reporting, the United States is able to cross-match the information on an
automated basis, and determine whether this entity itself presents audit or prosecution
opportunities.
CRS completely exempts all FIs accounts from being reported (section VIII(D)(2) of the
Standard defines "Reportable Person" as "a Reportable Jurisdiction Person other than:
(vi) a Financial Institution." An FI is expressly excluded from reporting). The FIs
themselves have their own reporting obligations that would disclose reportable persons'
ownership and control in the FIs but, compared with FATCA, what may be lost is the
information about the FIs themselves that certain CRS signatories could have used to
cross-match with their domestically gathered information. Thus, the ability to cross-
check in information at the entity level may be lost. This is a significant loss of information
caused by exempting FIs altogether under CRS.

Choice-of-law rules

CRS follows FATCA's approach in adopting a "residency" test in determining which

jurisdiction's rules govern a particular entity's FATCA/CRS due diligence and reporting.
This is generally a tax residency rule, except that for partnerships it means the place of
effective management, and for trusts it means the trustees' residency. It follows that
partnerships and trusts could be treated as "resident" in more than one jurisdiction. It
also follows that there may be a disconnect between where an entity is treated as resident
under FATCA and where the same entity is resident under CRS.

FATCA generally avoids duplication of reporting in that most of the IGA jurisdictions
allow an entity subject to multiple jurisdictions to opt into one jurisdiction and out of the
others. By contrast, CRS encourages duplicate reporting (para. 240 of the Implementation
Handbook says, in relation to "double or multiple residency" that "due to the multilateral
context of the Standard in case of double or multiple residency of an Accountholder,
determined on the basis of the due diligence procedures, information will be exchanged
with all jurisdictions in which the Accountholder is found to be resident for tax
purposes"). While this is reasonable given CRS's multilateral nature, for trusts, it means
that relevant fiduciaries are reported to all jurisdictions involved with the entire value of
the underlying trust assets. This is quite in line with CRS's general tendency to use
fiduciaries as the effective vehicle to ensure asset owners' tax compliance. One will query
whether the current information-sharing regimes are set up to officiate competing
countries' claims to taxing priority.

CRS and FATCA equal U.S. as the new tax haven for
nonresidents?
As if the similarities and differences between CRS and FATCA were not intriguing enough,
the interaction of the two generates a surprising outcome - for non-U.S. taxpayers, the
United States is becoming the big black hole in the global transparency network that it
pioneered in building (see "The Biggest Loophole of All," The Economist, February 20,
2016). Indeed, a non-U.S. resident's financial assets booked in the U.S. financial system
and held through U.S. entities (especially entities classified as U.S. FIs for CRS purposes)
may escape disclosure to any government entirely as a result of the interaction between
FATCA and CRS (for an excellent discussion of how various rules interact with each other
to result in such an outcome, see Cotorceanu, "Hiding in Plain Sight: How Non-U.S. Persons
Can Legally Avoid Reporting Under Both FATCA And GATCA", 21 Trusts & Trustees 1050
(December 2015)).

CRS makes this surprising outcome possible because the United States is not a CRS
signatory (thus, U.S. FIs do not have CRS reporting obligations) and CRS exempts U.S.
NFEs from being recharacterized as FIs (thus, U.S. NFEs do not have the obligation to
disclose controlling persons and the underlying assets). (The general rule is that a FI in a
non-CRS participating jurisdiction would be recharacterized as a passive NFE, so that the
controlling person rules could be applied to the entity to capture ultimate beneficial
ownership and control. See section VIII(D)(8) of the Standard. This is to prevent clever
planning that uses non-CRS participating jurisdictions to get around CRS reporting. Yet
the one single favorable exception is given to the United States in paragraph A(5) of the
Introduction to the Standard, where the OECD exudes the confidence that FATCA "is
compatible and consistent with the CRS for the United States to not require the look
through treatment for investment entities in Non-Participating Jurisdictions".) This
outcome also is made possible because FATCA is effectively a one-way street -
information flows from FATCA partner countries into the United States ("inbound
disclosure"). The U.S. did promise certain FATCA partner countries to reciprocate by
providing financial information of their taxpayers that is in the possession of the U.S.
financial system ("outbound disclosure") and even indicated that this outbound
disclosure had begun (IRS News Release IR-2015-111). Yet, in reality, it is unclear exactly
what information the United States gave to which FATCA partner countries. What is clear
is that U.S. domestic law does not require or allow U.S. financial institutions to collect
from accountholders the type and scope of beneficial ownership information that is
comparable to what FATCA requires of foreign financial institutions.

Recognizing the U.S.'s potential FATCA obligations to reciprocate with certain partner
countries, Treasury's Financial Crimes Enforcement Network (FinCEN) released a Notice
of Proposed Rulemaking on customer due diligence and beneficial ownership ("proposed
FinCEN rule") in August 2014 (www.fincen.gov/statutes_regs/files/CDD-NPRM-Final.pdf).
If adopted, the proposed FinCEN rule likely would be the only U.S. law comparable to the
obligations that FATCA imposes on foreign financial institutions, and yet even this
proposed FinCEN rule specifically exempts bank or financial accounts held by trusts (in
defining "legal entity customer", the proposed FinCEN rule says in relevant sections:
"FinCEN proposes to define legal entity customers to include corporations, limited
liability companies, partnerships or other similar business entitiesIt does not include
trusts other than those that might be created through a filing with a state (e.g., statutory
business trusts)" (emphasis added)). As of the publication of this article, the FinCEN rule
is still in the proposed stage. Lacking a domestic enabling law, it is unlikely that the United
States is able to provide comprehensive FATCA-like information to its FATCA partner
countries in a legal and constitutional manner. In cracking down on offshore tax havens,
the U.S. may become a tax haven itself for non-U.S. persons.

This onshore tax haven is fortified by the U.S.'s general unwillingness to allow foreign tax
authorities to seize their tax residents' financial assets in the United States in civil cases.
(One may be quick to point out that the United States is far more receptive to enforcing
foreign tax judgments in criminal cases under its obligations in various criminal mutual
legal assistance treaties (MLATs). The authors question whether this clear distinction in
U.S. domestic law may influence tax enforcement changes in other jurisdictions. What if
a jurisdiction realized that it could recover its taxpayers' assets in the United States only
if it pressed criminal charges in cases that otherwise would remain civil? If domestic U.S.
law encouraged such unjustifiable foreign prosecution strategy, it certainly would cause
a backlash in U.S. courts. As a result, such MLATs do not change the civil landscape and it
remains difficult for foreign tax authorities to recover their taxpayers' assets in the United
States in civil cases.) Indeed, even if FATCA partner countries obtained information about
their tax residents' financial assets in the United States under FATCA (which is not
currently available on a comprehensive basis given the lack of implementing legislation
in the United States), if they wanted to use this FATCA information to seize the financial
assets to satisfy their tax residents domestic civil tax liabilities, they likely would find
themselves dealing with a hostile U.S. legal system. Generally, the U.S. has treaty
obligations to enforce foreign civil tax judgments with only five countries - Canada,
Denmark, France, the Netherlands, and Sweden (see Art. 26A of the U.S.-Canada, Art. 27
of the U.S.-Denmark, Art. 28 of the U.S.-France, Art. 31 of the U.S.-Netherlands, and Art. 27
of the U.S.-Sweden income tax treaties). In addition, the revenue rule, a common-law rule
deeply rooted in the U.S. legal system, essentially prevents U.S. courts from enforcing
foreign civil tax judgments and is viable enough to cause federal and state legislatures to
specifically carve out foreign tax judgment components in international conventions or
state statutes. (As recently as 2005, the U.S. Supreme Court indirectly affirmed the
viability of the ancient revenue rule. See Pasquantino 544 U.S. 349 (2005). In addition, in
a recent congressional report, the U.S. Senate cited the revenue rule as grounds for
reserving the U.S.'s right not to enforce foreign tax judgments as a condition for ratifying
the amended version of the OECD Multilateral Convention on Mutual Administrative
Assistance in Tax Matters. See "Explanation of Proposed Protocol Amending the
Multilateral Convention on Mutual Administrative Assistance in Tax Matters"; Staff of the
Joint Committee on Taxation (February 2, 2014). ("[T]his doctrine, known as the 'Revenue
Rule', is rooted in common law and sovereign immunity the doctrine remains a
cornerstone of all common law jurisdictions, as well as many others"). At the state level,
the Uniform Foreign-Country Money Judgments Recognition Act, which otherwise could
be invoked by foreign tax authorities to have their judgments enforced in the United
States, specifically carves out foreign tax judgments on the grounds of the revenue rule.)

Conclusion
As discussed, many of the CRS signatories either do not tax their tax residents on their
foreign income or do not tax their nonresident citizens on their worldwide income. These
countries might have a hard time finding out their tax residents' financial assets in the
United States, and they might then not be able to use the information (if available) in one
of the few realistic ways. All this is thanks to the interaction between CRS and FATCA.
The unfolding of events in 2016 and beyond may prove or disprove several of the authors'
observations or raise even more intriguing questions. The journey has just begun.
Exhibit 1: hierarchy of FATCA authorities and flow of
information
Exhibit 2: hierarchy of CRS authorities
Exhibit 3: flow of information under CRS