Both jurisdictions also pledge to sign up to "UK FATCA"
The US Foreign Account Tax Compliance Act, commonly referred to
as FATCA, became effective earlier this year, and foreign financial
institutions ("FFIs") in every jurisdiction, including in
the British Virgin Islands
("BVI") and the Cayman Islands,
will be required to make certain reports to the US Internal Revenue
Services (the "US IRS").
Both the BVI and Cayman Islands Governments have recently
announced that they will pursue the finalisation of a Model I
intergovernmental agreement
("IGA") with the United States
in response to FATCA. This is welcome news as it will simplify
FATCA compliance for a range of BVI and Cayman financial
institutions that fall within FATCA's scope including hedge and
private equity funds.
There are currently two model IGAs being considered. Model II,
which essentially requires FFIs to report directly to the US IRS,
and a Model I which provides for implementation of the
requirements through domestic reporting and reciprocal automatic
exchange of information based on existing agreements. Model I B is
a variation of Model I which is not reciprocal ie the US does not
report information to the foreign jurisdiction.
On 4 April 2013 the BVI Government announced that it would
pursue a Model I B agreement. This closely followed the
announcement on 15 March 2012 by Cayman Islands Ministry for
Financial Services that the Cayman Islands would pursue a Model I
Agreement. Both announcements had been widely
anticipated.
Under the Model I IGA regime, FFIs located in the BVI and Cayman
Islands will be required to report FATCA information to the BVI or
Cayman Islands Government which in turn will report that
information to the United States IRS. The commitment to the Model I
IGA has received the widespread support of both the Cayman Islands
and the BVI financial services industry, and followed significant
consultation between the respective governments and representatives
of local financial services industry associations. Fund managers
and other offshore users had expressed a general preference to
deal with foreign financial institutions that do not report
directly to the IRS, but to their home governments.
The new IGAs will sit alongside the BVI's 22 and
Cayman's 31 existing tax information exchange agreements,
including that with United States. Both the BVI and Cayman
have also implemented the European Union Savings Tax Directive
which has been in place since 2005.
In addition to the Model I agreement with the US, the Cayman
Islands Government and the BVI Government also announced that
each intend to conclude negotiations to enter into a similar
arrangement for automatic provision of information to the United
Kingdom. The Crown dependencies of Jersey, Guernsey and the Isle of
Man have also committed to the UK to enter into such
arrangements. Although, such arrangements have come to be
known as "UK FATCA" or "son of FATCA" the
actual arrangements will inevitably differ in a number of ways due
to the fundamental differences in the UK tax treatment of its
residents and citizens compared to the US.
Harneys has been heavily involved in the BVI consultation in
relation to FATCA and UK FATCA participating through membership in
the Government's FATCA Focus Group, board membership of the BVI
Investment Funds Association, chairmanship of the Securities and
Investment Business Advisory Committee and membership of the
Financial Services Business Development Committee.
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