The Cayman Islands Government announced last week that negotiations with the United States (US) on a Model I Intergovernmental Agreement (IGA) and a new Tax Information Exchange Agreement (TIEA) have now been concluded. These agreements create the means for automatic exchange of information under the US Foreign Account Tax Compliance Act (FATCA) and should greatly ease compliance with FATCA in the Cayman Islands.

Both governments have initialled the agreements, to indicate intent to sign, and have noted that the official signing will take place as soon as possible.

What is US FATCA?

FATCA is a piece of US legislation and part of the US Hiring Incentives to Restore Employment (HIRE) Act. It was signed into US law on 18 March 2010.

FATCA imposes a reporting system on US taxpayers holding financial assets outside of the US, requiring them to report those assets to the US Internal Revenue Service (IRS). Meanwhile, foreign financial institutions (FFIs) are also required to report certain information directly to the IRS about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.

Why has FATCA been introduced?

The key objective of FATCA is to identify those US persons who may be evading tax through the use of offshore investment vehicles, and to ensure that the US tax authorities are collecting the appropriate amount of tax from all US persons.

Who does FATCA affect?

If you are:

  • A US or UK person; or 
  • A non-US or non-UK financial institution (FFI) or affiliate; 
  • A non-financial foreign entity (NFFE); or 
  • A US or UK withholding agent, FATCA affects you.

FATCA imposes a withholding tax of up to 30% on certain payments to FFIs unless the FFI enters into a contract directly with the IRS (FFI agreement). Such agreements (as currently drafted) contain obligations which can conflict with local laws in many jurisdictions.

Intergovernmental Agreements

To deal with the conflicts caused by FFI agreements, the US developed two model IGAs in conjunction with France, Germany, Italy, Spain and the UK.

The Model I IGA operates on a reciprocal basis so that there is a bilateral exchange of tax information with the US, and is only available to jurisdictions that already have an income tax treaty or tax information exchange agreement with the US, and have robust protections in place to keep the information that is exchanged confidential. The Model II IGA operates on a non-reciprocal basis so the US is not obliged to share information.

The obligations under the Model IGAs are broadly similar to those contained within the FFI agreements, but provide significant benefits. In particular, FFIs in a jurisdiction that enters into an IGA: 

  • Will not need to sign an FFI agreement (although some form of registration is necessary); 
  • Will not be subject to withholding under FATCA, and will not have to withhold on payments to others (subject to certain exceptions); and 
  • Should be able to rely on national implementing legislation to cut through any local law conflicts (for example data protection laws) and other contractual impediments.

In addition, IGAs simplify the steps needed to comply with FATCA, reducing the draft regulations originally issued by the IRS to around 30 pages in the IGAs.

Cayman FATCA Agreement

As stated Cayman has opted to enter into a Model I IGA (the reciprocal IGA) which means FFIs in the Cayman Islands will report accounting information direct to the Government and the Government will relay the information to the IRS. The agreement is widely viewed as a positive step in facilitating compliance with FATCA by the financial services sector. It is anticipated that industry will benefit from having the Government managing a standardised framework for data reporting, as the FATCA model is likely to be adopted as a template for multilateral information exchange arrangements in the future.

In such cases, it will also reduce the administrative costs for FFIs in that they will not have to collect and transmit data to other governments themselves.

Following conclusion of the US agreement, the Government will continue with discussions with the UK's HM Treasury in order to finalise the terms of the Model I IGA FATCA agreement.

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.