Since before 2010 when the Foreign Account Tax Compliance Act (FATCA) was introduced by the US it is safe to say that advisors have been considering the potential impact of FATCA on their clients. It was not uncommon for a Cayman Islands legal practitioner to have to review the articles of association, subscription agreements and/or offering materials of a fund client to determine how it might best deal with a recalcitrant investor (i.e. an investor that refused to provide any FATCA information that the fund might request to avoid being subject to FATCA withholding tax).
However, FATCA took on a real measure of significance in the Cayman Islands toward the end of 2013 when, on 29 November 2013, the governments of the Cayman Islands and the US entered into a Model 1B (i.e. non-reciprocal) Intergovernmental Agreement (the "US IGA")1 .
Following the signing of the US IGA, FATCA was propelled to the forefront of every Cayman Islands legal practitioner's mind and it was difficult to attend an educational seminar, read any industry booklet or review your email inbox without noticing the term "FATCA".
Anyone versed in things FATCA will also be aware that, not wanting to be outdone, the UK government also entered into its own intergovernmental agreement with the Cayman Islands government on 5 November 2013 (the "UK IGA" and together with the US IGA, the "IGAs"). The UK IGA provides for a tax information reporting regime which is similar in scope to that of the US IGA.
Unfortunately, each IGA brought with it a lot of uncertainty as, by itself, it did not impose any obligations on a Cayman Islands Financial Institution (which includes an Investment Entity, as the most relevant sub-category for the funds industry). The IGAs still required Cayman Islands local legislation to clarify and bring into force certain powers and responsibilities of the Cayman Islands Tax Information Authority (TIA) and to create appropriate legal obligations on Cayman Islands Financial Institutions to gather the relevant tax information and to report it.
Related thereto, the TIA's FATCA Guidance Notes (the "Guidance Notes"), drafted by a working group made up of members of the private and public sector, had also not yet been finalised. This was all set against a background of a US FATCA withholding tax coming into effect on 1 July 2014 for non-compliant entities.
With only draft Guidance Notes and draft domestic legislation in circulation, many clients adopted a "wait and see" approach to FATCA, taking some initial preparatory steps based on the language of the IGAs, but waiting for certainty of legal obligations before taking any firm action.
In July 2014, the Guidance Notes, the Tax Information Authority (International Tax Compliance) (United States of America) Regulations, 2014 (the "US Regulations") and the Tax Information Authority (International Tax Compliance) (United Kingdom) Regulations, 2014 (the "UK Regulations" and together with the US Regulations, the "Regulations") were finalised and published2.
So what is it that the Guidance Notes and the Regulations say and do?
In broad terms, the Guidance Notes and the Regulations serve the following purposes:
(a) They assist Cayman Islands entities in determining their status as either a Financial Institution (FI) or a Non-Financial Foreign Entity (NFFE).
(b) The Regulations set out the fundamental obligations on an FI in relation to: (i) in the context of the US Regulations only, registration with the US Internal Revenue Service (IRS)3; (ii) notification of status to the TIA by 31 March of the first year of reporting4; (iii) identification of reportable financial accounts5; (iv) initial and on-going due diligence requirements6, including timeframes; and (v) reporting of financial accounts by 31 May annually7.
(c) The Regulations provide the TIA, as the competent authority, with appropriate enforcement powers including the ability to compel disclosure of information and to inspect Reporting FIs8.
(d) The Regulations provide penalties for offences and non-compliance, including vicarious liability provisions for directors, officers, etc9.
(e) The Guidance Notes expand on each of these areas while also addressing the approach under both the US and UK FATCA regimes, as well as the OECD's Standard for Automatic Exchange of Financial Information in Tax Matters (which incorporates the Common Reporting Standard).
(f) The Guidance Notes particularly focus on the classification of, and distinction between, FIs and NFFEs, Reporting FIs and Non-Reporting FIs, as well as Registered Deemed Compliant and Certified Deemed Compliant entities.
(g) For Investment Entities, the Guidance Notes clarify the use of the exemptions for Collective Investment Vehicle, Sponsored Investment Entities and Sponsored Closely Held Investment Vehicles, as well as more generally for Trustee Documented Trusts.
(h) The Guidance Notes provide a comprehensive explanation of the due diligence procedural obligations for pre-existing and new accounts including reliance on self-certification forms. In relation to an FI's due diligence obligations, it is worth noting that the final form US W-8 and W-9 series of self-certification forms (together with accompanying instructions) are now available.
Unsurprisingly, the UK IGA does not permit reliance on the US W-8 or W-9 forms and specific forms have therefore been developed and authorised by the TIA for use under the UK IGA as well as an alternative for use under the US IGA.
While the Guidance Notes and the Regulations provide some initial regulatory certainty to industry professionals and their advisors, it is worth noting that the Guidance Notes (and to a certain extent the Regulations) are subject to ongoing review and modification10. It is also worth noting that the US Regulations and the UK Regulations do not have identical provisions. This presents its own set of challenges to uniform compliance and may need to be addressed in time.
In addition, as part of an early adopter group of OECD and non-OECD countries, the Cayman Islands is one of the countries that is expected to have the Standard for Automatic Exchange of Financial Information in Tax Matters in place for the first automatic exchange of information to take place in September 2017. The timetable for implementation of the Standard provides for 31 December 2015 as the date for determining if an account is pre-existing and 1 January 2016 as the date for determining if an account is new. While nothing immediate is required, it is likely that further changes to the Regulations and the Guidance Notes will be necessary to prepare for the next international wave of tax information reporting standards.
This article first appeared in the Q3 2014 edition of the AIMA Journal.
1. Although signed, the US IGA did not come into force until one month from the date on which the Cayman Islands gave written notice to the US that it had completed its necessary internal procedures for the US Tax Information Exchange Agreement to come into force. The Cayman Islands gave such written notification to the US on 14 March 2014 and accordingly, the US IGA came into force on 14 April 2014.
2. The UK Regulations and the US Regulations both came into law on 4 July 2014; the first official version of the Guidance Notes were issued on 22 July 2014.
3. See US Regulations 4(1) and (4)(2).
4. See US Regulation 14(3) and UK Regulation 10(3).
5. See, for example, US Regulation 6(1) and UK Regulation 4(1).
6. See, for example, US Regulations 6(3) and 6(4) and UK Regulations 4(3) and 4(4).
7. See US Regulation 8(3) and UK Regulation 6(3).
8. See US Regulations 15(1) and 15(2) and UK Regulations 11(1) and 11(2).
9. See US Regulation 16(2) and UK Regulation 12(2).
10. At the time of writing, we understand that the Working Group intends to reissue a second version of the Guidance Notes during the fourth quarter of 2014.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.