On 13 August 2013 the Cayman Islands Government ('CIG') announced that it had concluded negotiations with the United States of America on a Model Form 1 Inter Governmental Agreement ('IGA'), and that the official signing will be held as soon as possible. The CIG also announced that it has agreed a new tax information exchange agreement ('TIEA') with the US. The move was welcomed by representatives from the Cayman Islands' financial services industry as providing further evidence of the CIG's continuing commitment to maintain the Islands' reputation as a well regulated and transparent international financial centre ('IFC').
By signing a Model Form 1 IGA with the US, the CIG has agreed to the automatic exchange of information ('AEOI') under the US' Foreign Account Tax Compliance Act ('FATCA'), which will streamline the reporting of information to the US Internal Revenue Service ('IRS'). Under FATCA, all Foreign Financial Institutions ('FFI's) to disclose information on any financial accounts that they hold which either belong to US taxpayers or to foreign entities which are substantially owned by US taxpayers. Without the IGA 1 each FFI (which includes both investment funds and managers) would have to collect and transmit data to the IRS on their own. With the AEOI in place, the CIG will create a standardised framework for Cayman-based FFIs to report data to it, which it will then relay to the IRS, via the Cayman's Tax Information Authority ('CTIA'), the Islands' only channel for the provision of tax-related information to other governments.
The creation of a standard mechanism for reporting will help reduce the administrative costs of FFIs based in the Islands, and the mechanism created to comply with FATCA requirements will also serve as a template for future AEOIs with other countries. Cayman's Minister for Financial Services commented that the global community is moving in the direction of one AEOI standard and that these new agreements with the US "demonstrate Cayman's commitment to engage in globally accepted tax and transparency initiatives".
The original TIEA with the US was signed back in 2001, and the U.S. Treasury's Robert Stack praised the CIG, which "...consistently demonstrates leadership in transparency matters through its global engagement, including its work on both the Steering Group and the Peer Review Group of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes".
What happens next?
Both sides have initialled the agreements to confirm their intention to sign, but the texts will not be made public until after the official signing. Once the agreement has been signed then the Cayman Islands will be added to the list on the IRS website of jurisdictions which will be treated as having an IGA in effect, even if the IGA has still has not entered into force as of 1 July 2014. FFIs registering with the IRS from the Cayman Islands will be registered as "deemed compliant". Following the signing with the United States, the CIG will have further discussions with the UK's HM Treasury in order to finalise the terms of the UK Model 1 IGA FATCA agreement.
Although the announcement that the Cayman Islands would enter into a Model 1 IGA was made back in March, the fact that negotiations are concluded and agreements initialled and ready to sign will give the Cayman Islands financial services industry confidence that, once again, the jurisdiction's government has shown its commitment to keeping the burden of financial regulation in proportion to its benefit.
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