"He hath founded it upon the seas..."
From an ancient decree
The motto on the Cayman Islands flag has profound meaning for all residents, whether indigenous or not. At 3:00am on 7 February 1794 the Royal Navy Frigate HMS Convert and its convoy of nine merchant ships were ship wrecked on the barrier reef at East End, Grand Cayman. Caymanians from East End and Bodden Town responded to the distress signals, paddling their canoes to rescue 450 sailors from the 'Wreck of the Ten Sails'. The legend is that one of King George III's sons was among the saved. The good King rewarded Caymanian heroism by issuing a Royal Decree: the Cayman Islands would forever be free from taxation and war conscription. Queen Elizabeth II visited East End on the 200th anniversary of the shipwrecks and dedicated a memorial to the six victims. We named a new highway in honour of Her Majesty's special visit.
Whilst the shipwrecks are long gone and there is no documentary evidence of the original Royal Decree, the Cayman Islands has never taxed its residents on their income. There are now almost as many Reporting Financial Institutions (RFIs) resident here as there are individuals. And so, the effects of that legendary Royal Decree are every bit as tangible as the memorial for the six lost souls and the Queen's Highway.
To a new world order
Fast forward to 20 October 2015. The Cayman Islands Government announced that the International Tax Compliance (Common Reporting Standard) Regulations, 2015 (CRS Regulations) are now in effect and come into force on 1 January 2016. "Accordingly from that date the Common Reporting Standard forms part of the law of the Islands." What exactly does this mean for all those RFIs and to their directors, advisors and service providers and, even more importantly, to their investors, clients and customers?
Automatic Exchange of Information
The CRS Regulations are a key component of Cayman's implementation of automatic exchange of financial account information in accordance with the internationally agreed standard. For the purposes of the CRS Regulations the Common Reporting Standard Commentary made and published by the Organisation for Economic Co-Operation and Development (OECD) is an integral part of the Common Reporting Standard and accordingly applies for the purposes of the automatic exchange of financial account information under a relevant scheduled Agreement. A relevant scheduled agreement is an agreement that permits the automatic exchange of information for tax purposes and is set out in a Schedule to the Tax Information Authority Law. The Tax Information Authority will publish a list of Participating Jurisdictions for the purposes of the Common Reporting Standard at least annually in the Government Gazette.
The CRS Regulations provide that the Tax Information Authority may issue guidance to aid compliance. The Government's Working Group is currently considering questions surrounding guidance and self-certification forms. Whilst more will be communicated to industry on these subjects in the coming weeks, guidance is not anticipated to be extensive as the official CRS Commentaries must be relied upon. The Tax Information Authority's Guidance will be limited to particular local issues, if any.
The CRS and Commentaries
The CRS Regulations expressly state that the CRS Commentary made and published by the OECD is an integral part of the CRS itself and accordingly applies for the purposes of the automatic exchange of financial account information under a relevant scheduled Agreement. The Government strongly encourages industry to familiarise itself with the CRS and Commentaries, and also advises industry to visit the OECD's comprehensive automatic exchange portal, which contains all resource materials.
The CRS and Commentaries exceed 300 pages. Added to over 200 pages of Guidance Notes issued by the Tax Information Authority on the ITC Regulations regarding the Cayman Islands Intergovernmental Agreements (IGAs) with the U.S. and the UK, this is a lot to assimilate and put into practice. The learning curve and implementation challenges may be exacerbated for directors, principal points of contact and fund administrators that are not in one of the 90 plus participating jurisdictions under the CRS. The United States and approximately 130 other jurisdictions will not be participating in the CRS.
'Policies and Procedures' versus 'Arrangements'
The CRS Regulations do introduce a significant new concept. Every Reporting Financial Institution "shall establish policies and maintain procedures designed to identify Reportable Accounts." The policies and procedures shall:
(a) Identify each jurisdiction in which an Account Holder or a Controlling Person is resident for income tax or corporation tax purposes or for the purpose of any tax imposed by the law of the jurisdiction that is of a similar character to either of those taxes;
(b) Apply the due diligence procedures set out in the CRS; and
(c) Ensure that any information obtained in accordance with the CRS Regulations or a record of the steps taken to comply with the CRS Regulations in respect of a Financial Account is kept for six years from the end of the year to which the information relates or during which the steps were taken.
The express reference to "policies and procedures" is an important clarification and improvement upon the vague term "arrangements" used in the International Tax Compliance Regulations regarding the US and UK IGAs and, indeed, the draft CRS Regulations circulated to the local industry in September.
This appears more consistent with the requirement for a written FATCA Compliance Program required by Foreign Financial Institutions (FFIs) that must enter into an FFI Agreement with the U.S. Internal Revenue Service upon registration on the IRS FATCA FFI Registration System. FFIs are required to enter into an FFI Agreement unless they are based in a jurisdiction (like the Cayman Islands) that has a Model 1 IGA with the U.S.
Sound advice – do not delay preparations for CRS compliance
The Government has advised the industry to not delay preparations for CRS compliance pending issue of any guidance. Industry also is advised that the list of participating jurisdictions for the purposes of the CRS will be published in the Gazette shortly. RFIs also should consider advising clients and account holders that, with the advent of CRS, they should ensure that their tax affairs are in compliance in their jurisdictions of residence; that they provide RFIs with all necessary details to enable them to report under CRS; and that data will be reported to tax authorities in their jurisdictions of residence.
As mentioned above, the Government has deferred finalizing the parts of the CRS Regulations dealing with compliance until December 2015. We expect that, like the other ITC Regulations, the CRS Regulations will hold the following individuals accountable for acts and omissions resulting in regulatory breaches by their RFI:
(a) If the RFI is a body corporate, any director, manager, secretary or other similar officer of a body corporate, or any person who was purporting to act in such capacity.
(b) If the RFI is not a body corporate, any person exercising management or control such as a partner, member, trustee or other person purporting to act in any such capacity.
International Tax Compliance (ITC) Manual
The ITC Manual – i.e. compliance program - is a "must have" given that it is now abundantly clear that the Tax Information Authority will expect each and every RFI to have and maintain written policies and procedures. Presumably, auditors of any RFIs that are regulated by the Cayman Islands Monetary Authority will add the ITC Manual/compliance program to their regulatory checklists in due course.
We suggest that it is not sufficient for Cayman hedge funds, private equity funds and other investment entities to simply rely upon their fund administrator's policies and procedures on anti-money laundering and compliance with the U.S. Foreign Account Tax Compliance Act. Rather, the fund must have its own written policies and procedures which deal with the roles of the governing body, principal point of contact and their oversight of the fund administrator and compliance personnel. The ITC Manual should also give guidance on the reporting of any suspicion of tax evasion - arising in the course of ITC due diligence procedures -to the RFI's Money Laundering Reporting Officer (MLRO) pursuant to the Money Laundering Regulations.
Sinclairs has developed a comprehensive and economical International Tax Compliance (ITC) Manual for Cayman Islands investment entities. This document comprises the policies and procedures required to comply with the CRS Regulations in addition to the ITC Regulations which implement the U.S. and UK IGAs. The document will be tailor made for each RFI and is designed to be as user-friendly as possible for the RFI's directors or governing body, principal point of contact for all purposes of compliance with the ITC Regulations, and their delegates such as fund administrators and compliance personnel. Please contact us today for further information on this unique, valuable and timely resource and free information on entity classification under the CRS Regulations.
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.