Understanding What Tax Information Exchange Is and Why Thailand's Participation in the FATCA Agreement with the U.S. and the OECD's CRS Framework Is Important

Many countries view that "one of the reasons for tax evasion is that the state cannot see the true income of its citizens held in other countries," which leads to significant revenue loss for the government.

Therefore, in recent years, there has been a push for "international tax information exchange" both from the United States under the FATCA agreement and from international organizations under the OECD's CRS (Common Reporting Standard). Currently, Thailand has committed to both agreements.

What is tax information exchange? It is the exchange of financial information of taxpayers because this information is not within the jurisdiction of the tax authority of that country to verify, as it is held in financial institutions abroad. For example, Mr. A, a U.S. citizen, has invested and has income deposited in a bank account located in Thailand. Therefore, even though the U.S. requires its citizens to file taxes every year, even if they do not reside in the U.S. that year, Mr. A's money in the Thai bank is difficult for the U.S. tax authority to verify, which poses a jurisdictional issue affecting tax transparency.

  • The differences between FATCA and CRS

1.Contracting parties for FATCA involve an automatic information exchange agreement (once a year) between Thailand and the U.S. Under FATCA, Thailand is obligated to send financial information of U.S. citizens residing in Thailand to the U.S., and conversely, the U.S. must send financial information of Thai citizens in the U.S. to Thailand.

For CRS, it is the exchange of information according to the standards set by the OECD. Thailand has joined the Global Forum on Transparency and Exchange of Information for Tax Purposes, which under the Global Forum's commitments, Thailand must exchange information both upon request (Exchange of Information on Request: EOIR) under the framework of double taxation agreements with 60 contracting countries and must exchange information automatically in a multilateral manner with 136 member countries in the network.

2. Who's information must Thailand report? This includes information of both individuals and legal entities. For FATCA, it must be financial information of U.S. persons, which means U.S. citizens, dual citizens, green card holders, and individuals who are tax residents in the U.S. (e.g., those who reside in the U.S. for more than 183 days in the tax year).

For CRS, it will consider the tax residency of individuals or residency for tax purposes. The principle of tax residency differs from the general residency principle. For individuals, it is based on the number of days spent in that country to determine tax liability. For example, if a person stays in country A for 180 days and earns income there, country A has the right to tax that income.

Thus, when aligned with CRS requirements, it can be concluded that individuals to be reported by Thailand are those who are not tax residents in Thailand but are tax residents of contracting states in the tax information exchange network. Practically, one individual may be a tax resident of multiple countries if they have lived in different countries meeting each country's criteria in the past tax year.

3. Who is responsible for reporting? Overall, FATCA and CRS define "reporting financial institutions" similarly, considering the type of business that may generate income and could be used as a repository for individuals' profits, including: 1) deposit-taking institutions such as banks, 2) custodians of financial assets, 3) investment businesses managing investments for clients, such as fund management services.

4) Life insurance businesses issuing policies with cash value or annual payment types (which are investment-linked insurance).

4. Information to be reported Although the information to be reported is similar in that it must include customer identification information such as account names and taxpayer identification numbers, it also includes account or financial information reflecting customer income. However, FATCA only requires reporting the year-end sum or the sum showing inflows and outflows, while CRS specifies a more complex set of data, such as accounting movements, loan documents, and documents related to financial institutions' interactions with customers.

5. Penalties For FATCA, if Thailand does not participate, Thai financial institutions with income generated in the U.S. will face a 30% withholding tax without the ability to utilize benefits under double taxation agreements to reduce/exempt the FATCA penalty rate, as the U.S. views FATCA as an agreement established after double taxation agreements, following the Later-in-Time Principle, meaning any law/agreement that comes into effect later takes precedence. For CRS, there are no penalties imposed by withholding tax from network countries like FATCA, but consequences may include pressure or countermeasures from international organizations or member countries in various forms, such as Thailand potentially being classified as a country with a non-transparent tax system, which could lead to being placed on the EU blacklist.

6. Progress Both agreements are in the process of drafting domestic laws, with FATCA at the stage of drafting subordinate legislation, and for CRS, the Revenue Department is currently gathering opinions on the draft law for international tax information exchange compliance (until August 31, 2020).

Ultimately, it cannot be denied that tax exchange is the trend of international taxation in the future that Thailand cannot avoid.

[This article represents the author's personal opinion]

SOURCE: www.bangkokbiznews.com