Understanding the Legal Entity Identifier (LEI) and Tax Identification Number (TIN)

Introduction

The Legal Entity Identifier (LEI) is a standardized identifier used to provide verified data on legal entities. It is registered within the Global LEI System, a centralized system. In the United States, the Tax Identification Number (TIN) includes the Social Security Number (SSN) issued to individuals and the Employer Identification Number (EIN) issued to individuals or entities. In this blog, let’s explore what is LEI number, LEI registration process, what is TIN, and the difference between LEI and TIN.

What is a Legal Entity Identifier?

In the US, the LEI is a 20-character alphanumeric code based on the ISO 17442 standard by the International Organization for Standardization (ISO). It serves as a reference for important information, promoting transparency in financial transactions involving stocks, bonds, or forex.

The LEI connects to key reference information, facilitating clear and unique identification of legal entities involved in global financial transactions. It comprises two main sections: Level 1 – “who is who” and Level 2 – “who owns whom.”

Level 1 data includes entity registration details such as legal name, registration number, and addresses. Level 2 provides information about the entity’s ownership structure, answering the question of who owns whom. The publicly available LEI data pool transforms unstructured entity registration data into a standardized global directory, enhancing transparency in the global marketplace.

Procedure for Obtaining a Legal Entity Identifier (LEI)

To comply with the requirement for companies engaged in financial transactions, such as securities trading or participating in over-the-counter (OTC) derivatives markets, it is necessary to obtain a Legal Entity Identifier (LEI). The registration process for an LEI number involves the following steps:

Step 1 – The first step is to assess whether your business activities necessitate an LEI. If your company engages in financial activities like buying or selling securities or participates in OTC derivatives markets, an LEI is mandatory.

Step 2 – Once you have determined the need for an LEI, you must select a Local Operating Unit (LOU) to obtain your LEI. The Global Legal Entity Identifier Foundation (GLEIF) has approved over 30 LOUs that can issue LEIs. You can choose any LOU authorized to provide LEIs in your region or country.

Step 3 – After selecting an LOU, you need to submit your LEI application. The application process may vary depending on the chosen LOU but typically requires providing information about your company, including its legal name, address, and registration number. Additional details about the ownership structure and business sector of your organization may also be required.

Step 4 – There is a cost associated with obtaining an LEI, which is typically paid at the time of application and renewed annually. The payment process varies depending on the selected LOU.

Step 5 – Once your application is approved, and the payment is processed, you will receive your LEI. The LEI is a unique 20-character identifier that represents your legal entity. It is essential to enter your LEI whenever conducting financial transactions.

Tax Identification Number (TIN) in the US

In the United States, taxpayer identification numbers play a crucial role in identifying individuals and entities for tax purposes. There are several types of TINs issued by the Internal Revenue Service (IRS), each serving a specific purpose:

1. Social Security Number (SSN): The Social Security Number (SSN) is issued to individuals and is the most common type of TIN. It is used for various purposes, including employment, tax reporting, and accessing government benefits. The SSN is unique to each individual and remains with them throughout their lifetime.

2. Employer Identification Number (EIN): The Employer Identification Number (EIN) is assigned to businesses and other entities for tax identification purposes. It is also referred to as a federal tax identification number. The EIN helps identify business entities and is used for tax reporting, opening business bank accounts, and hiring employees. In certain cases, such as estates and trusts with income reported on Form 1041, the EIN is also utilized.

3. Individual Taxpayer Identification Number (ITIN): The Individual Taxpayer Identification Number (ITIN) is issued by the IRS to individuals who are required to have a U.S. taxpayer identification number but are not eligible to obtain an SSN. This includes non-resident aliens, dependents or spouses of U.S. citizens or residents, and others who need to fulfill tax obligations. The ITIN helps individuals meet their tax requirements even if they do not possess an SSN.

Difference Between LEI and TIN

There are only 2 major differences between LEI and TIN in the USA:

1. The Legal Entity Identifier (LEI) is a global standard identifier that provides verified data on legal entities participating in financial transactions. It is a 20-character alphanumeric code based on the ISO 17442 standard. The LEI connects to reference information about the entity, such as its legal name, registration details, and ownership structure. It enhances transparency by standardizing and organizing entity registration data in a global directory. The LEI is primarily used in financial markets, facilitating transparent and reliable identification of entities engaged in activities such as trading stocks, bonds, and forex.

On the other hand, the Tax Identification Number (TIN) is a unique identifier used by the Internal Revenue Service (IRS) in the United States to track tax-related activities of individuals and entities. The TIN includes different types of identification numbers, such as the Social Security Number (SSN) and the Employer Identification Number (EIN).

2. While the LEI and TIN both serve as identification systems, they differ in their scope and application. The LEI is primarily used in the context of global financial transactions, providing standardized and transparent identification of legal entities. On the other hand, the TIN, comprising the SSN and EIN, focuses on tax-related identification of individuals and entities within the United States, facilitating compliance with IRS regulations.

Conclusion

In conclusion, the Legal Entity Identifier (LEI) and the Tax Identification Number (TIN) serve distinct purposes in the realm of identification and transparency. The LEI is a globally recognized identifier that promotes transparency in financial transactions. On the other hand, the TIN is a system used in the United States by the Internal Revenue Service (IRS) for tax-related identification of individuals and entities.