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":
- to sign an agreement themselves,
- to pay 30 per cent withholding tax in every transaction in US dollars, or
- 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.