Cayman Islands: Impact Of The Common Reporting Standard On Cayman Islands Financial Institutions – Top 5 Questions Clients Are Asking About CRS

1. What is CRS?

"CRS" or Common Reporting Standard is a regime developed by the OECD to facilitate and standardise the exchange of information on residents' assets and income, primarily for taxation purposes, between numerous jurisdictions around the world. Officially referred to as the OECD Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard, the Cayman Islands has committed to implement this with effect from 1 January 2016.

CRS is akin to a global version of FATCA and will require certain "Financial Institutions" (discussed below) to identify the tax residency of their customers and report on details of specified personal accounts to the tax authorities in the jurisdictions which implement CRS.

The Cayman Islands became a signatory to the Multilateral Competent Authority on Automatic Exchange of Financial Account Information (the "Agreement"), the agreement to adopt and implement CRS, on 29 October 2014.

Over 90 jurisdictions have currently committed to CRS, with 58 signed up to the Agreement as 'early adopters' who go live in 2016.

2. Has CRS been implemented into Cayman Islands law?

Not yet. However, the Department of International Tax Cooperation (the "DITC") is scheduled to introduce local regulations in October of this year.

3. What steps should CI Financial Institutions take?

  1. Compliance with CRS will require similar action to compliance with FATCA – for example, revised due diligence to determine the tax status and residence of account holders, and associated ongoing reporting obligations.
  2. Financial Institutions will need to have updated on-boarding procedures to determine CRS Status of new account holders from 1 January 2016.
  3. CRS will apply not only to accounts opened post 1 January 2016, but will also require classification of pre-existing accounts with a phased in timetable to allow remediation of accounts opened prior to 1 January 2016.

Unlike US FATCA which requires Financial Institutions to register with the United States Internal Revenue Service to obtain a GIIN, there are no additional registration requirements for Cayman Islands domiciled Financial Institutions with overseas tax authorities. Information provided to the DITC will be exchanged automatically between the DITC and overseas taxing authorities.

Offering documents and subscription agreements for Cayman Islands investment funds should be updated to incorporate appropriate references to CRS – typically this can be contained as part of existing disclosures by including an expanded definition of FATCA.

Where an investment fund uses "self-certification" forms (excluding IRS forms) to address FATCA, it may be possible to rely on the same self-certification forms to address CRS, although new standardised self-certification forms may be released in due course to recognise differences in local tax regimes in countries who sign up to the Agreement. Whilst the intention of CRS is to set a global standard for reporting financial information, this may be difficult as the definition of and requirements for tax residency vary across countries.

Managers of Cayman Islands investment funds should speak to their administrators (or whoever is responsible for client on-boarding) to determine the whether the right information is being collected to determine tax residence of investors in their funds.

4. When, what and how does a CI Financial Institution report?

Similar to the current FATCA regime, most "Financial Institutions" will need to report annually to the DITC for CRS purposes. Reporting Financial Institutions will include most investment funds (both hedge and private equity), which are categorised as "Investment Entities". Like FATCA, there are exemptions for certain types of non-reportable accounts, which include companies listed on recognised stock exchanges, government entities and central banks.

There are some limited exemptions, which include certain entities that are classified as "Non-Reporting Financial Institutions". These include government entities, central banks, international organisations, governmental pension funds, and trusts whose trustees are Reporting Financial Institutions.

The first reports to the DITC are scheduled for 31 May 2017 in respect of new accounts opened during the 2016 calendar year.

As to what is reportable – essentially the same information which is included in a FATCA report is to be included in a CRS report in respect of individuals, corporations, partnerships, trusts, foundations or similar legal arrangements which are resident in a "Reportable Jurisdiction" (meaning, those jurisdictions which are signatories to the Agreement) such as:

  • The name, address, jurisdiction(s) of residence, TIN(s) and date and place of birth of the financial account holders (including certain entities and their controlling persons);
  • Account details;
  • The name and identifying number of the reporting entity; and
  • Financial information to be reported will include interest, dividends, account balances, income from certain insurance products and sale proceeds from financial assets.

Reports should be filed with the DITC via the Cayman Islands AEOI Portal, allowing the DITC to obtain and collate information from all Financial Institutions based in the Cayman Islands and exchange that information with the partnering tax authorities in participating countries.

5. Are there any penalties for non-compliance?

In accordance with section 4 of the Agreement, the penalties for non-compliance are those as specified under the domestic law of the jurisdiction in which the non-compliance occurs. Accordingly, it is expected that the penalties imposed for non-compliance under CRS will be similar to those under FATCA. However, unlike the US FACTA regime, CRS does not call for any withholding tax to be applied.

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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