Fatca was introduced in 2014 and requires foreign financial institutions to disclose any accounts held by American citizen clients either to the US Internal Revenue Service (IRS) or to their domestic tax authority.
This was because, at the time, there was no standardised international method to share account information between countries.
However, the Organisation for Economic Co-operation and Development (OECD) common reporting standard (CRS) was proposed straight after the introduction of Fatca.
Although CRS was largely based on the US legislation, it focuses on tax residence rather than citizenship.
Call to switch
As many countries have adopted CRS, there has been pressure from around the world for the US to follow suit.
This is because Fatca puts the compliance burdens on foreign financial institutions, something they wouldn’t need to do if the US adopted CRS.
However, under common reporting standard rules, the financial institution would only need to share information with the jurisdiction of tax residency, instead of the IRS as Fatca requires. So, if a US citizen lived in France and had an account in Germany, the financial institution would only have to notify France and not the US.
But the congressional report argues that swapping Fatca for CRS would only benefit foreign financial institutions, as it would cost the US an ‘unknown amount’ more to make the changes without any tangible benefit to the IRS.
In fact, under CRS, the US tax authorities would not be informed of any accounts belonging to US citizens living overseas, even if they have a US tax obligation.