Main challenges faced by Financial Institutions for their FATCA/CRS reporting process

Since 2015, Luxembourg Financial Institutions (FIs) have been required to submit FATCA/CRS reports to the Luxembourg tax authorities (LTAs) on an annual basis by 30 June. The steps outlined below should be followed and documented to meet the “Register of Actions” as introduced by the FATCA/CRS laws. 

1. Entity scoping

The first step for a financial group with multiple FIs will be to determine the scope of the entities for which a FATCA/CRS report should be prepared and filed. For this purpose, it is recommended to have a register of all the entities of the group with their different FATCA/CRS statuses.

We then recommend checking this register against the list of FIs on the portal of the Internal Revenue Services (IRS) to ensure that each FI is registered. This check is particularly important for those entities created during the previous financial year. De-registering liquidated entities from the portal as soon as they are liquidated and filing the latest FATCA/CRS reports with all client/investor accounts as “closed” constitutes best market practices to avoid any breach of reporting obligations.

2. Client/investor reportability assessment

Once the scope has been determined, the clients/investors static data needs to be extracted in order to determine their reportability. Luxembourg FIs should update their systems to include the new reportable jurisdictions stated in the Grand-Ducal Regulation of 23 December 2022, i.e. Jamaica, Moldova, Montenegro, Uganda and Thailand.

During this review phase, particular attention should be paid to the reasonability of the FATCA/CRS status, particularly for clients/investors qualifying as active non-financial foreign entities or as FIs in an offshore jurisdiction (please refer to our previous flash news).

We recommend performing a final check of the tax residence based on publicly available information and then cross-checking this against the latest AML-KYC documentation. Another example of best practice that is being applied by an increasing number of FIs is checking the client/investor population against the one reported the year before and explaining any differences.

It is important that the correct tax identification number (TIN) of the investor/client be reported. Not only is the TIN a unique key reference that unequivocally identifies the taxpayer, but it is also one of the most important pieces of information to report. If, however, the FIs have not yet collected the TIN for the preexisting investor/client, such person should be contacted on a best-effort basis at least once a year. It may also be useful to check the TIN format via the OECD website or the European Commission website.

For FATCA reporting, with regard to missing U.S. TINs, attention should be paid to IRS Notice 2023-11, in which the U.S. tax authority sets out the conditions under which an FI will not be considered to be in breach of its FATCA obligations vis-à-vis the missing U.S. TINs of their U.S. reportable investors. For more information, please read this article written by our PwC US colleagues.

For the reports to be submitted for FY 2022, FIs can use either the TIN codes published in May 2021 (article about the missing U.S. TIN) or the ones published in 2023 (which will be the mandatory ones for FATCA reports to be submitted for FYs 2023 and 2024). All these TIN codes can be found in the IRS FATCA FAQs. 

3. Generation of the reports

When the reportable population has been identified, the FI then has to determine the value of the client’s financial assets/investments as at the end of the reporting year as well as the gross payments derived from said financial assets/investments.

While determining this value should not be an issue for banks and life insurance companies, having (audited) financial statements ready prior to the reporting deadline can prove difficult for investment entities and holding companies in particular.

If all of the above steps are performed correctly, the final validation of the reporting data should merely be a formality for the officer in charge.

Once the reports have been filed and validation feedback received from the LTAs, said reports (in their XML local format) and validation feedback as well as any supporting documentation must be stored for 10 years.

4. GDPR aspects

The Luxembourg law incorporating DAC 7 into national law will also amend the CRS law with regard to data protection requirements. This law will establish a new obligation to notify (on an annual basis) individual clients and investors (as well as controlling persons) on the personal information shared on the CRS reports, prior to their filing.

As the law has just been adopted, FIs should think about how they wish to communicate with their clients/investors and to adapt their reporting process in order to be able to notify said clients/investors before the reporting deadline.