FATCA: Notification from the Luxembourg Tax Authorities in case of missing US TIN

In brief

We mentioned in a previous edition (May 2020) the requirement for Financial Institutions to establish FATCA and CRS governance and controls mechanisms as part of a compliance program. The monitoring by different tax authorities about such procedures and notably the data quality of the reports is more and more specific. As a first step of those controls, the Luxembourg tax authorities are currently sending notification letters to Financial Institutions in order to obtain missing or invalid US Tax Identification Numbers in FATCA reports.

In detail

Following some automatic controls on the 2020 FATCA reports, the Internal Revenue Service (“IRS”) notified the Luxembourg tax authorities (“LTA”) for each report containing missing or invalid Tax Identification Numbers (“TINs”). The LTA are currently sending letters to all concerned Luxembourg Reporting Financial Institutions (“FIs”) including those having used the required explanation codes.

At this stage, those FIs should continue their best efforts to obtain the missing TINs or a proof that their clients or investors are not Specified US Persons (or ceased to be). Based on the results of such on-going due diligence, they would then need to amend their 2020 FATCA reports by 31 December 2021 accordingly.

A notification has also been sent for Passive Non-Financial Foreign Entities (“NFFEs”) with US Controlling Person(s) for which only the Passive NFFE had a missing US TIN. While most of them have valid reasons not to have such numbers (as they are not US entities), the current reporting schema did not allow to not include a US TIN or replace it with a foreign TIN which triggered this error message. As from next year, following an adaptation of the IT systems of the LTA, those entities will be reported with their foreign TIN (normally collected under CRS).

At this stage, the LTA are not asking for any explanations or justifications. However, it is best practice for the FI to keep evidence of the best efforts undertaken to obtain those missing TINs (e.g. annual reminders, blocking of the account, etc.). The LTA also recommends that those efforts are described in the FI’s operational procedure.

Even though those compliance steps should help in the case of further requests from the IRS, it remains unclear at this point of time what approach will be taken by the latter in the absence of amended reports as well as the potential consequences if they would consider that the absence of US TIN results from a major non-compliance issue (e.g. treat the entity as a Nonparticipating FFI, request a review of the policies and procedures, ask for an audit of the FI processes, etc.).

The takeaway

This automatic notification is the result of a stricter approach by tax authorities worldwide with respect to the quality of the information exchanged via the FATCA and/or CRS reports. As a result, it is strongly recommended that FIs:

• review their current operating model;

• document how their related procedures are complied with on a day-to-day basis and are tailored to their operational processes;

• ensure relevant employees are regularly trained; and

• strengthen their controls including when client/investor on-boarding and reporting processes are carried out by third-party providers.