FATCA, CRS, and withholding tax relief claims under higher scrutiny

In Belgium, like in many other countries, financial institutions are experiencing an increase in notices and inquiries about customer tax operations and reporting. This is especially true for compliance with FATCA and the Common Reporting Standard (CRS). Recent events show that Belgian tax authorities are intensifying their focus on tax abuse in connection with withholding tax relief claims.
 

Across the globe, tax authorities strive to enforce the Common Reporting Standard (CRS) effectively.

CRS was developed in response to a request from the G20 and approved by the OECD Council in 2014. It requires jurisdictions to gather information from their financial institutions and automatically exchange it with other jurisdictions annually. The CRS specifies the financial account information to be exchanged, the financial institutions required to report, the account types and taxpayers covered, and the due diligence procedures to be followed by financial institutions.

To assess compliance, the OECD conducts peer reviews to verify whether jurisdictions have implemented appropriate legal frameworks and whether the AEOI is effective in practice. The latest peer review report, published in November 2024, uses a green, amber, and red traffic light system to indicate whether jurisdictions have appropriate frameworks “in place,” “in place but needing improvement,” or “not in place,” and whether the effectiveness of their AEOI is “on track,” “partially compliant,” or “non-compliant.” The report shows a high level of completeness in the legal frameworks, with 95% of jurisdictions having frameworks that are either “in place” or “in place but needing improvement.” Additionally, 67 out of 104 jurisdictions received an “on track” rating for their practical implementation.

Belgium stands out for having both the legal frameworks in place and being on track with its effective implementation, earning a completely positive evaluation.
 

However, the report stresses the need for more progress in ensuring effective implementation by reporting financial institutions.

No jurisdiction indeed wants an amber or red review, leading to increased activity by tax authorities in many jurisdictions. Tax authorities are extending data analytics, increasing audits, and issuing questionnaires to identify potential risks. Completed questionnaires or other data often lead to detailed compliance checks, starting with a desktop review and sometimes progressing to an onsite visit. Tax authorities frequently ask if the financial institution has had an independent review of their compliance, a common question in many jurisdictions.

Armed with additional information, there is an observed increase in penalties where local regulations permit. These penalties have financial repercussions and harm brand reputation and customer trust. Three main areas are under scrutiny:

1. Data quality: There have been improvements in the collection of Tax Identification Numbers (TINs) and reductions in reported undocumented accounts, but inaccurate data issues persist.
2. Governance: Institutions must demonstrate implementation of adequate processes and controls to report data correctly.
3. Identification of in-scope entities and products: Misclassification of entities and products remains a challenge, prompting tax authorities to leverage data from the US IRS’s Global Intermediary Identification Number (GIIN) listing to identify misclassified entities.

Linked to this, in some jurisdictions, we noticed an increase in notices for institutions that have filed a nil-return, often being the result of misunderstanding of what constitutes an in-scope entity or product.
 

Audit activity in Belgium

Several Belgian financial institutions were recently audited by the Belgian tax authorities resulting in hefty fines in a number of cases. Whilst initially audits were focused very much on the implementation efforts done, more recently the focus has shifted to under- and overreporting of accounts. In addition, certain financial institutions were fined for late reporting even where the reporting was submitted only one day late.

These audits are triggered in part by the pressure of the peer review process mentioned above but also by notifications received from foreign jurisdictions regarding the reporting of accounts that were not actually reportable.
 

Penalties are already biting and proving to be quite severe.

As a result of these developments, penalties for non-compliance are becoming increasingly severe across various jurisdictions, particularly in Belgium, where penalties on financial institutions are imposed on a per account holder basis (rather than as one FI) meaning that errors across multiple accounts could act as a significant multiplier upon the penalty amount. Penalties start at EUR 1,000 per account and apply in case of underreporting, overreporting, incomplete reporting, refusal to report, late reporting and also in the case of incorrect application of the applicable due diligence requirements. Other violations of the FATCA/CRS requirements are sanctioned by a penalty of EUR 2,500. This means that process design, data sourcing or manual errors, can lead to significant penalties.

In the case of fraudulent intent or intention to harm, the aforementioned penalty amounts will be doubled. A waiver may be granted if the violations are due to circumstances beyond the control of the reporting financial institution.

Financial institutions are advised to take proactive measures to maintain compliance, including proper classification of entities, regular governance reviews, and thorough audits of data quality. Engaging with tax authorities early when issues arise can facilitate remediation and mitigate penalties. In this connection we advise clients to perform periodic risk assessments and health checks to ensure that flaws are detected early and are timely remediated.

Increased scrutiny… thanks to increased resources and capabilities

To handle the increased effort of enhanced scrutiny, some tax authorities have hired additional inspectors and invested in enhanced data analytical capabilities. Hence, developing your own data capabilities and running your own data analytics can help identify errors before the tax authority does.

Belgium also shows this trend in other operational tax domains, indicating stronger enforcement.

For instance, the tax authorities have recently intensified their scrutiny of standard withholding tax (WHT) reclaims filed by non-residents. This increased scrutiny focuses on beneficial ownership and often leads to requests for additional evidence to substantiate claims.

But more remarkably, non-resident investors who have claimed Belgian withholding tax relief at source or quick refund (I.e. process whereby the relief is granted by the withholding agent after dividend payment but before remittance to the tax authorities) are now also receiving inquiries from the Belgian tax authorities for documentation typically requested as part of the standard reclaim process but not in connection with claims for relief at source or through quick refund.

Moreover, foreign taxpayers who fail to respond to inquiries from the Belgian tax authorities are facing ex-officio reassessments, which are then communicated to Belgian establishments of the foreign entity. This trend underscores the tax authorities' enhanced capability to process large volumes of data and verify taxpayer compliance.
 

Conclusion

The implications of these developments are significant, as they demonstrate the tax authorities' willingness to allocate more resources to the fight against tax fraud and abuse. Taxpayers and financial institutions must remain vigilant and proactive in addressing compliance issues to avoid penalties and unfavorable assessments.

Please get in touch with koen.marsoul@be.ey.com and aurore.mons.delle.roche@be.ey.com should you wish to discuss your needs and concerns in connection with the ongoing audit activity. We have an experienced team that can assist with risk assessments, health checks, remediation and penalty mitigation efforts. We can also support you throughout the audit process by reviewing and responding to tax authorities’ requests for information and penalty notices.