Cayman Islands: Getting Up To Date On FATCA - A Recap And Update

Last Updated: 18 February 2016
Article by Tim Dawson

Most Popular Article in Cayman Islands, February 2016

What is FATCA?

FATCA refers to US legislation more fully known as the Foreign Account Tax Compliance Act and includes the US Treasury regulations implementing it. It was enacted as part of the Hiring Incentives to Restore Employment Act of 2010 (otherwise known as the, "HIRE Act") on 18 March 2010.

The goal of FATCA is to enable the IRS to identify US persons (generally US citizens or residents) seeking to evade US taxation by holding assets in foreign (i.e. non- US) accounts, whether in their own name or via non-US structures such as trusts or funds. FATCA requires information about US persons and their foreign accounts to be reported directly or indirectly to the IRS.

Non-compliance with FATCA may lead to a US withholding tax of 30% on US source income, including the gross sales proceeds of certain U.S. assets.

What is UK FATCA?

UK FATCA (also known as "son of FATCA") is the name popularly (but not officially) given to a regime, which the UK government promoted from 2012 onwards in response to FATCA. In essence, the goal of UK FATCA is the equivalent of FATCA but in respect of UK residents rather than UK persons, i.e. it is to enable HMRC to identify UK residents seeking to evade UK taxation by holding assets in foreign (i.e. non-UK) accounts, whether in their own name or via foreign structures such as trusts or funds.

How is FATCA Implemented in the Cayman Islands?

The Cayman Islands entered into a Model 1 inter-governmental agreement (US IGA) with the US. Under Model 1 IGAs, financial institutions gather the relevant information and report this to their home country (usually its tax authority). The home country then forwards on the information to the IRS. A similar inter-governmental agreement was signed with the United Kingdom (the UK IGA) (together with the US IGA, the IGAs), with respect to the automatic exchange of tax information relating to UK tax resident persons and entities.

The draftsmen of UK FATCA deliberately adopted terminology and approaches used by FATCA in order to create a reporting regime that is similar to FATCA with a view to minimising the compliance and systems burdens faced by financial institutions. In particular, the UK IGA is based on the US IGA and the Guidance Notes (discussed below) combine the guidance issued in respect of FATCA with UK FATCA.

There are, however, some key differences, as follows:

  1. There is no equivalent in UK FATCA to the 30% withholding tax under FATCA as a penalty for noncompliance. Instead criminal penalties for non-compliance are contained in the domestic legislation enacting UK FATCA;
  2. UK FATCA is targeted at UK residents (not citizens), whereas FATCA is targeted at US citizens (wherever resident) and US residents; and
  3. There is a special regime in UK FATCA applicable to individuals who are resident but not domiciled in the UK known as the Alternative Reporting Regime.
  4. In Cayman the US IGA and UK IGA has been given the force of law by domestic legislation. The relevant statutory provisions for the US IGA and the UK IGA are found in the Tax Information Authority (International Tax Compliance) (United States of America) Regulations, 2014 and the Tax Information Authority (International Tax Compliance) (United Kingdom) Regulations, 2014 respectively, each coming into force on 4 July 2014.

The Cayman regulations in essence impose obligations on reporting Cayman financial institutions to adopt due diligence procedures for identifying and reporting US and UK Reportable Accounts and require them to make an annual return to the Cayman Islands Tax Information Authority (TIA). Failure to comply with the regulations is an offence punishable by a fine and/or imprisonment of a term of two years.

The IGAs and the domestic legislation are supplemented by extra-statutory guidance notes (the Guidance Notes) that provide some practical help on the manner in which the IGAs should be implemented. The latest version of the Guidance Notes from the TIA was issued on 15 December 2014. Additionally, the Cayman Islands Department for International Tax Cooperation (the DTIC) has released a user guide in respect of the Cayman Islands Automatic Exchange of Information Portal (the Portal), which is discussed further below.

What are the Reporting Requirements of Cayman Financial Institutions?

Broadly, "financial institutions" are defined in the relevant Cayman legislation and guidance notes under the categories of investment entities, custodial institutions, depositary institutions and specified insurance companies. A Cayman Islands financial institution is any financial institution organised under the laws of or resident in the Cayman Islands.

All Cayman Islands financial institutions will be reporting financial institutions unless they fall within a narrow range of exemptions, which will be relevant in very few cases. Therefore, for instance, the vast majority of hedge and private equity funds will be reporting financial institutions.

Pursuant to the Cayman Islands implementing legislation, all Cayman Islands reporting financial institutions have to register on the IRS website and obtain a global intermediary identification number (GIIN).

Cayman Islands reporting financial institutions had until 30 April 2015 to notify the DTIC of:

  • their name
  • their FATCA classification
  • GIIN
  • Principal Point of Contact

The deadline for submission of FATCA reports by Cayman Islands financial institutions is 31 May annually.

The reporting format is consistent with currently published Schemas by the IRS for US FATCA and by the OECD for the Common Reporting Standard (see further below), and is in XML format. Cayman Islands financial institutions have the option of submitting reports to the DTIC individually, by entering information manually on the website, or via bulk submission by uploading an XML file(s). Cayman Islands financial institutions that have registered as a sponsoring entity have the ability to upload an XML file containing information for multiple financial institutions.

However, according to DTIC releases, and contrary to domestic legislation in force at the time of writing, it is not necessary to file a nil return. Given their customer base, many Cayman financial institutions may not have anything to report. The DTIC has however noted that the Portal will accept nil returns. Furthermore, the Office of the Chief Counsel at the IRS has stated that submitting a nil return is "best practice" and that the IRS intends to use non-filing for three consecutive years as an indicator of possible non-compliance. Once a financial institution is registered on the Portal (and has carried out all its requisite due diligence), filing a nil return is straightforward. Therefore we expect that many financial institutions will choose to file a nil return as a matter of course.

The Extension of FATCA to Other Countries

The OECD, working with the G20 is working on proposals to develop a global standard for the automatic exchange of information on tax, to be known as the "Common Reporting Standard". In January 2014 the OECD published a report containing its proposals including a template form of IGA, which is substantially influenced by the FATCA approach. On 29 October 2014, 51 jurisdictions (including the Cayman Islands), signed an agreement to automatically exchange information based on Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters. This agreement specifies the details of what information will be exchanged and when, as set out in the Common Reporting Standard. Many other countries have agreed to become signatories. Therefore, it is reasonable to expect that, in the near future, automatic exchange of information on tax will be rolled out to other EU member states and G20 countries and other nations after that.

About the Author

Tim Dawson, Senior Associate, leads Mourant Ozannes' regulatory practice in the Cayman Islands. His work includes acting on mergers, acquisitions and disposals of regulated and unregulated entities, joint ventures, advising on regulated activities, stock exchange listings and the establishment and servicing of investment funds. Tim is fluent in Portuguese and Spanish and has lived and worked in Brazil.

Originally published in Cayman Finance Magazine, 2015-2016, Issue 2

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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