Cayman Islands: The Arrival Of FATCA

Read the article in the Cayman Financial Review Magazine 

On 15 March, 2013, the Cayman Islands government announced its intention to sign an agreement with the United States authorities to adopt a Model 1 Intergovernmental Agreement (IGA) in response to the US Foreign Account Tax Compliance Act. This decision was reached following a series of dialogue sessions with private sector entities, including Cayman Finance, which played a pivotal role in assisting the government reach its decision. 

The effective day of implementation of FATCA is firmly upon us, and some action is required urgently. What action and when it is required from financial intermediaries depends in part on the way Cayman as a whole decides to implement FATCA. The possibility of the Cayman Islands government signing an IGA with the US government was therefore analysed carefully to see if this would be a suitable means by which Cayman could deal with the new legislation, which would be affecting all foreign financial institutions on island. In addition, the government, with assistance from the private sector, would need to decide which type of IGA – Model 1 or Model 2 – should be agreed upon.

Cayman Finance analysed the different routes to implement FATCA and included wider industry feedback, which it then submitted to government. The process took several months, and it is anticipated this type of dialogue will hopefully be a model to follow as Cayman faces new challenges ahead; hopefully, the industry can build on this positive experience.

FATCA's reach

However FATCA was intended to be implemented, it meant authorities in the US would receive information of every account that has a US link, included but not limited to: persons born in the US, even if they have never lived in the US, any account with a US address, any account with a US person as signatory, etc. In fact, if the financial intermediary had a suspicion of US indicia, it would be forced to enquire with the customer and, if not satisfied, to report the account or flag it as recalcitrant and potentially withhold on it.

While small accounts are not subject to reporting, the threshold is very small for a country such as the Cayman Islands with one of the highest per capita incomes in the world, and there is a requirement the account be reported if at any point in time during the year the threshold is exceeded, so playing with month or year end balances would not help.

It is expected the US authorities will use this information to cross-reference against tax filings of the individuals, and as such, if anyone thought (incorrectly) a Cayman bank account could be used to hide taxes, it will most certainly now be absolutely impossible.

After careful consideration and due feedback from members, Cayman Finance decided to advise the Government a Model 1 IGA would be the best route for the financial services industry here as a whole – first and foremost because the industry did not want anyone to use Cayman to evade taxes. In fact, over the last few years the industry has demonstrated a consistent desire to help other countries enforce their tax laws.

From a customer perspective the implementation of FATCA would have been basically the same (with some small differences), whether the Cayman Islands government had agreed to sign an IGA or not. As the US has the world's reserve currency, all banks and most other financial intermediaries settle their transactions in US dollars.

However, if the Cayman Islands government had decided against signing a direct agreement with the US, individual companies would have had three "choices":

  1. to sign an agreement themselves,
  2. to pay 30 per cent withholding tax in every transaction in US dollars, or
  3. not to use US dollars any longer.

For Cayman's financial industry, the second and third options were simply not feasible. From an industry perspective signing an intergovernmental agreement has significant reputational benefits and simplifies some of the aspects of implementing FATCA versus signing direct contracts between the companies and the IRS.
The possibility of future "FATCAs"

The agreement only applies to the US, and at this moment, no other country has tried to enact similar legislation. However, the UK has requested all overseas territories implement a similar reporting system, so for Cayman it means this will apply to accounts with a UK and US "link"; and more recently, a growing number of countries are seeking a multilateral agreement to exchange similar information automatically. While these countries would not seek to impose a withholding tax, Cayman has expressed the intention to join this multilateral system.

In conclusion, a widely accepted system of automatic exchange of information is a reality that will be implemented in the next few years, making the evasion of taxes through the use of offshore accounts a thing of the past once and for all.

The effects on Cayman's finance industry

There is a wide misconception Cayman's financial services industry is built around some kind of secrecy or tax evasion structure. Nothing could be further from the truth.

The financial services industry provides a tax efficient structure for transactions. "Tax efficient" is not a fancy phrase for tax evasion. Tax efficiency means each investor or investment pays the appropriate taxes in the place where the investor is, or the investment is made without creating a second layer of taxes that some times, although very expensively, could be recovered through double taxation treaties but in many cases cannot be recovered and leads to double taxation. Double taxation does not mean both countries will have revenue and more taxes are collected; in most cases, it will mean the investment is not made, affecting economic growth and ultimately worsening the fiscal position of more governments around the world.

However, while it is not expected to affect business volume, FATCA is a complex legislation, and its implementation even with an intergovernmental agreement is complex and costly. Financial intermediaries all around the world are currently devoting significant resources to its implementation, and this factor cannot be ignored. However, this cost will affect all financial industries around the world, so from a competitive perspective, it will not necessarily have a negative effect on Cayman's financial industry; in fact, some believe it may have a positive effect.

Cayman continues to suffer from an outdated, Hollywood-like perception of the industry by some uninformed or ill-intended groups.  As FATCA comes into full force, these groups will not be able to mischaracterise Cayman – at least not as easily as they have. Cayman has a simple and very effective business model. It should be and is the envy of many other countries.

As FATCA helps the jurisdiction remove the rumours and mischaracterisations, it is anticipated that increasingly more businesses will not be discouraged by the international media and will consider Cayman as beneficial jurisdiction to conduct international business.
Preparations for FATCA

Individuals with any link to the US or any member of their immediate family with links who have not been filing US tax returns will have some serious and expensive work to do, and the same will be true soon for a number of other countries. Companies that may be considered a financial intermediary (and this is much wider than banks) should have been working on how to deal with FATCA for many months, if not years.

Even companies that are not an intermediary but have a signatory, an address, operations, a director, a significant shareholder, etc with a US link may still be affected by FATCA, so it is always best to seek advice from a professional.

Cayman Finance realises further education is needed on this extremely important subject and so, in conjunction with the government's Ministry of Financial Services, held a seminar on FATCA on Thursday 27 June at The Westin Casuarina Resort.

Michelle Bahadur, Director with the Financial Services Secretariat, Ministry of Finance, gave an update on the intergovernmental negotiations that led to the Cayman Islands government's announcement that it intends to sign a Model 1 IGA with the US government. Attorneys Martin Livingston from Maples and Calder and Steven L Cantor from Cantor & Webb PA presented on issues such as identifying exactly what is a US account, as well as looking at key implications for the industry from the perspective of trusts, funds, structured finance and securitisation vehicles. Paul Eldridge from PricewaterhouseCoopers gave an overview of the FATCA registration process and gave insight as to how FATCA will impact the insurance industry, as well as individuals.

Cayman Finance is considering a follow up seminar in the Fall to keep interested parties updated on the latest FATCA developments.

Disclaimer: The author realises many of the details regarding the automatic exchange of information and the implementation of US and UK FATCA may have progressed considerably between the time of writing and publication. Further, the FATCA Seminar had not yet been held but written in past tense to coincide with publication.  

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.

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