As part of the Cayman Islands' ongoing commitment to international tax transparency, the Tax Information Authority (International Tax Compliance) (Country-By-Country Reporting) Regulations, 2017 (the 'Regulations') were issued on 15 December 2017.
What are the Regulations about?
Cayman is a member of the Inclusive Framework on Base Erosion and Profit Shifting ('BEPS') set up by the Organization for Economic Co-operation and Development ('OECD') and the G20 and which is designed to create a single set of consensus-based international tax rules to protect tax bases of respective countries while offering increased certainty and predictability to taxpayers. The Regulations create the legal framework in the Cayman Islands for the implementation of the model legislation published pursuant to the OECD's BEPS Action 13 Report (Transfer Pricing Documentation and Country-by-Country Reporting), which is one of the BEPS minimum standards to which all OECD and G20 countries (including the United States) have subscribed. The Regulations impose reporting obligations on constituent entities ('CEs') of certain multinational organizations ('MNE's') resident in the Cayman Islands.
Do the Regulations apply to Cayman Islands captives and insurance companies?
Yes, possibly. The Regulations apply to 'MNE Groups' which are defined as any Group that includes two or more CEs whose tax residence is in different jurisdictions but are related through common ownership or control, which would be expected to prepare consolidated financial statements, including an enterprise resident for tax in one jurisdiction and subject to tax with respect to business carried out by a permanent establishment in another jurisdiction. The MNE Group must also have had a total consolidated group revenue of at least US$850m in the preceding fiscal year. If consolidated group revenue is less than US$850m in the preceding fiscal year then the group will be an 'Excluded MNE Group' and the Regulations will not apply. Most Cayman captives will not meet this criteria and will not be subject to any filing or notification requirements under the Regulations. In the case of tax-exempt parent entities, the definition may be different. For example, the U.S. regulations provides that "revenue" in the case of an organization exempt from U.S. tax "includes only revenue that is included in unrelated business taxable income as defined . . .". Companies should carefully consider the application of the Regulations and, if necessary, take appropriate advice from Cayman and onshore counsel as to whether they fall within scope.
The Regulations define a 'Group' for these purposes as:
A collection of enterprises related through ownership or control such that it is either required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange.
'Consolidated Financial Statements' are defined as:
The financial statements of an MNE Group in which the assets, liabilities, income, expenses and cash flows of the Ultimate Parent Entity and the Constituent Entities are presented as those of a single economic entity.
How does that affect Cayman CEs?
If a Cayman resident captive or insurance company is a CE and is also the MNE Group's 'Reporting Entity', then it has a reporting obligation and must file a Country-by-Country Report ('CbCR'). The Reporting Entity for these purposes will be either the 'Ultimate Parent Entity' or the 'Surrogate Parent Entity'.
The Ultimate Parent Entity is a CE of an MNE Group that:-
owns directly or indirectly a sufficient interest in one or more other CEs of the MNE Group such that it is required to prepare Consolidated Financial Statements under accounting principles generally applied in its jurisdiction of tax residence, or would be so required if its equity interests were traded on public securities exchange in its jurisdiction of tax residence; and
there is no other CE of the MNE Group that owns directly or indirectly an interest described in paragraph (a) in the first mentioned CE.
A Surrogate Parent Entity is a CE of the MNE Group that has been appointed by the MNE Group as a sole substitute for the Ultimate Parent Entity to file the CbCR in that CE's jurisdiction of tax residence on behalf of the said MNE Group when:-
the Ultimate Parent Entity of the MNE Group is not obligated to file a CbCR in its jurisdiction of tax residence; or
the jurisdiction in which the Ultimate Parent Entity is resident for tax purposes has a current International Agreement to which the Cayman Islands is a party but does not have a Qualifying Competent Authority Agreement in effect to which the Cayman Islands is a party by the time specified for filing the CbCR in respect of any relevant fiscal year; or
there has been a systemic failure of the jurisdiction of tax residence of the Ultimate Parent Entity that has been notified by the Cayman Tax Information Authority to the CE's resident in the Cayman Islands.
The Schedule to the Regulations includes the standard template and instructions and the report must be in the form of the CbCR xml Schema. The Industry Advisory which has been issued recommends that a Reporting Entity which is required to file a CbCR in 2018 should start preparing it as soon as practicable. More information is available on Cayman CbCR legislation and resources on the DITC website.
What about Cayman CE's that are not a Reporting Entity?
Any Cayman Islands resident captive or insurance company which is a CE but is not the designated Reporting Entity has a notification obligation and must notify the Cayman Islands Department for International Tax Cooperation ('DITC') that it is a member of an MNE Group. It must also confirm the name and jurisdiction of the relevant Reporting Entity for its MNE Group.
What are the timeframes for reporting?
Any CE that is resident in the Cayman Islands shall notify the DITC of whether it is the Ultimate Parent Entity or the Surrogate Parent Entity no later than the last day of the fiscal year of the MNE Group except that such notification shall be filed by 31 March, 2018 with respect to the fiscal year of the MNE Group that began during 2016. If it is not the Ultimate Parent Entity or the Surrogate Parent Entity the CE must also provide details of the identity and tax residence of the relevant Reporting Entity.
In the case of a CE which is also the Reporting Entity, the CbCR must be filed with the DITC by no later than 31 March 2018 in respect of fiscal years which began from 1 January to 31 March 2016. CbCR's for fiscal years which commence after 31 March 2016 must be filed no later than 12 months after the last day of the relevant fiscal year. The example given is that where the fiscal year began on 1 February 2016 the CbCR must be filed with the DITC by 31 March 2018, but where the fiscal year began on 1 May 2016 the deadline would be 30 April 2019.
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.