As a global business hub, the UAE always promotes ethical and transparent business practices. One of the aspects in this regard is taxation. When there is an interaction of global business players, there is a need for international cooperation to combat tax evasion. The UAE follows two main standards in this regard: the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS). The main purpose of complying with these complex-looking international standards is to ensure that no money is parked in the UAE to avoid overseas tax liabilities. This, in turn, will provide a transparent and compliant business environment in the UAE. In this blog, we explain the basics of the two standards, FATCA and CRS, concerning the UAE.
Automatic Exchange of Information (AEOI)
To deter tax evasion and promote tax transparency globally, there is an automatic exchange of information, or AEOI, between the higher authorities of different countries. This is basically as per the international agreements incorporated into the local laws of the land. As a form of AEOI, the UAE follows the FATCA and CRS regimes. The two regimes are different; however, their goals are almost the same. We will discuss both standards in the next section.
Fundamentally, the FATCA and CRS require UAE financial institutions to report the financial accounts’ information of reportable or controlling persons to the Ministry of Finance. This is usually applicable on an annual basis. The Ministry of Finance then reports to the Internal Revenue Service (IRS–USA) and other jurisdictions. Furthermore, the Ministry of Finance may have other ad hoc requests concerning these standards. Let’s discuss both of these standards one by one.
All UAE reporting financial institutions must register on the FATCA/CRS system and submit the relevant data and risk assessment by the relevant deadlines.
Foreign Account Tax Compliance Act (FATCA)
FATCA is a United States regime concerning the automatic exchange of information. The primary purpose of this regime is to avoid tax evasion by the overseas US tax residents (US citizens and/or green card holders living outside the US). It came into place in 2010 as part of the HIRE Act. The act requires foreign financial institutions to exchange relevant information with the IRS concerning the accounts of US persons.
Both governments (UAE & US) signed the intergovernmental agreement with an effective go-live date of 1st July 2014; the agreement is termed the UAE-US-IGA. The model is 1B IGA, which, in simple terms, means that there will be no reciprocal information sharing on the US part. The regime is confirmed after the Federal Decree Law No. 9 of 2016. It establishes the exchange of relevant information between two main subjects: UAE reporting financial institutions (UAE RFIs) and the Internal Revenue Service of the US.
The agreement (UAE-US IGA) explains all the related information that countries need to exchange. This includes:
- The specific information.
- The types of entities required to report.
- Different types of financial accounts.
- Account holders in scope.
- Due diligence procedures.
- Account holders’ onboarding procedures for financial institutions.
The FATCA agreement can be accessed here: https://www.centralbank.ae/media/xannnmzb/fatca-agreement.pdf
Common Reporting Standard (CRS)
The CRS was developed in response to the G20 request by the Organization for Economic Co-operation and Development (OECD) and approved on 15th July 2014 by the OECD Council. The standard requires jurisdictions to obtain certain information from financial institutions and automatically exchange that information with other jurisdictions. It is also done on an annual basis, like FATCA. Similarly, it covers the following information:
- Financial account information.
- Financial institutions.
- Types of accounts and taxpayers.
- Due diligence procedures.
The financial institutions in the UAE must consult the documentation issued by the OECD regularly. This can be for clarification, commentary, and FAQs. For instance, the following documents are issued by the OECD on their website:
- Standard for Automatic Exchange of Financial Account Information in Tax Matters
- Standard for Automatic Exchange of Financial Account Information in Tax Matters – Implementation Handbook
- CRS FAQs
As per Cabinet Decision No. 16 of 2016, the UAE government committed itself to signing the following:
- The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC) and
- The Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA).
The MCAA specifically contains rules of information exchange between the competent authorities of the UAE and partner jurisdictions. Furthermore, MCAA also covers the confidentiality, safeguards, and infrastructure requirements for effective exchange. Both agreements above are legal instruments for the implementation of AEOI–CRS for taxation purposes.
Conclusion
To combat tax evasion and promote financial transparency, it is essential to implement the Automatic Exchange of Information (AEOI) framework, enabling the systematic sharing of taxpayer data between global jurisdictions. In support of AEOI, the UAE complies with both FATCA and CRS regimes. While FATCA (Foreign Account Tax Compliance Act) governs information exchange exclusively with the United States concerning U.S. persons, CRS (Common Reporting Standard) enables data sharing between the UAE and other international partner jurisdictions, promoting broader global cooperation.
Creative Zone Tax & Accounting (CZTA)
Businesses must assess whether they comply with their reporting obligations as stipulated under the FATCA and CRS. Should a business require any additional information on its position and compliance requirements, it should consult with a professional advisor. Contact us today.
