It has now been over a year since the updated Enforcement Guidelines: Economic Substance (the "Guidelines") were issued on 31 March 2023, outlining the enforcement powers and processes of the Cayman Islands Tax Information Authority (the "TIA") in respect of administrative penalties against parties in breach of the International Tax Co-operation (Economic Substance) Act (2024 Revision) (the "ES Act").
The Guidelines provide guidance on the principles for the application of the administrative penalty framework to entities that are potentially subject to enforcement action as a consequence of contravening the ES Act and are to be read in conjunction with the Guidance on Economic Substance for Geographically Mobile Activities V 3.2 and Practice Points.
The Guidelines reflect the TIA's objective to ensure that entities comply with obligations under the ES Act by reporting complete and accurate information as to whether they are carrying on relevant activities and, if so, whether or not they are relevant entities under the legislation and are thereby required to satisfy economic substance requirements in the Cayman Islands (the "ES Test").
Enforcement
In exercising its powers and taking enforcement action for contraventions of the ES Act, the TIA adheres to general principles of reasonableness, transparency, lawfulness, rationality, proportionality and procedural fairness. The TIA must also exercise discretion, consider the available facts to determine the nature of the contravention and penalty to be applied to the entity in each case and take action that is timely and effective in dissuading future breaches of the ES Act.
Administrative Penalties Under the ES Act
Compliance with the ES Act is monitored and enforced by the TIA. The TIA has the power to impose administrative penalties under the ES Act for missed reporting, failure of the ES Test in year 1 and failure of the ES Test in a subsequent financial year (see sections 7(8A), 8(2) and 8(4) of the ES Act).
The ES Act provides for civil penalties up to CI$100,000/US$121,950 to be applied in relation to non-compliance with the applicable ES Test.
Where a relevant entity has satisfied elements of the ES Test, the TIA may adjust the amount of the penalty accordingly in consideration of the facts. The Guidelines provide an example in which a relevant entity has satisfied the "directed and managed" element of the ES Test but failed the other elements. In this scenario, the penalty under section 8(2) would be assessed at CI$8,000 instead of the maximum amount of CI$10,000, effectively representing a 20% discount on the amount of the penalty.
A penalty notice will be issued to a relevant entity where it fails to submit an ES Return, fails to meet the ES Test or fails to meet the ES Test in a subsequent financial year. Where there is a failure to submit its ES Return, the entity will have 30 days from the date of the penalty notice to do so. Where there is a failure to file within this deadline, the entity will be deemed to have failed the ES Test and the maximum penalty will be imposed under section 8(2) or section 8(4) of the ES Act, as applicable.
Where the TIA issues a penalty notice due to an entity failing to meet the ES Test in a subsequent financial year, it must provide the Registrar with a report of the relevant matters and any additional requested information. Upon receiving the report, the Registrar must apply to the Grand Court for an order under section 8(11) of the ES Act.
Offence
It is an offence for a person to knowingly or wilfully supply false or misleading information to the TIA under the ES Act. On summary conviction, this is punishable by a fine of CI$10,000 or with imprisonment for a term of five years, or both.
A person also commits an offence if they fail to provide or make available to the TIA within the time specified, or knowingly or wilfully alter, destroy, mutilate, deface, hide or remove, any information requested by the TIA under the ES Act that is in that person's possession or control. This offence is punishable on summary conviction by a fine of CI$10,000 or with imprisonment for a term of two years, or both.
It is also an offence to disclose information relating to the affairs of the TIA, a relevant entity or any officer, customer, investor, member, client or policyholder of a relevant entity. Such an offence is punishable on summary conviction to a fine of CI$10,000 or imprisonment for one year, or to both, and on conviction on indictment to a fine of CI$50,000 (or US$60,000), or to imprisonment for a term of three years, or to both.
In the circumstances that an offence under the ES Act has been committed by a body corporate and it is proved to have been committed with the consent or involvement of, or to be attributable to any neglect on the part of any director, manager, secretary or other officer of the body corporate, or any person who was purporting to act in such a capacity, the officer or any person purporting to act in that capacity, as well as the body corporate, commits that offence and is liable to be punished accordingly. Where the affairs of a body corporate are managed by its members, the aforementioned will apply in relation to defaults of a member in connection with the member's functions as if the member were a director of the body corporate.
Limitation Period
The TIA may not impose a penalty after either (i) one year of becoming aware of the breach; or (ii) six years after the breach occurred, whichever is the earlier date. Where a statutory filing deadline has been breached, the TIA is deemed to have become aware of the breach on the day after the filing deadline. If it is necessary for the TIA to investigate matters to determine whether an entity has failed the ES Test, the TIA is deemed to be aware that entity has failed the ES Test on the date that the investigation is complete.
Appeals
A relevant entity that fails to report by its deadline has 30 days within which to appeal after receiving a penalty notice from the TIA. Where it fails the ES Test, in its first year or a subsequent year, an appeal must be made within 28 days after receipt of a penalty notice. An appeal has the effect of a stay on enforcement proceedings pending a decision by the Court as to whether the TIA's determination stands and/or whether a penalty is appropriate or a different penalty should be imposed. A person upon whom a penalty is imposed may appeal against the penalty on the ground that liability to a penalty does not arise.
Recent Case Law
In October 2023 an application was made by China Construction Bank (Brasil) Banco Multiplo S/A in cause number FSD 313 of 2023, against the TIA, seeking an order under section 9 to reverse the issue of a penalty under the ES Act and a declaration that liability to the penalty did not arise. A consent order dated 12 January 2024 was granted to discontinue to the motion, with each party bearing their own costs.
This was an interesting result; whilst such applications are not frequent, we do anticipate an increase in similar applications, which may not resolve without contention.
It is important that Insurance entities are in compliance with the ES regime; failure to do so can lead to substantial penalties. Conyers Regulatory & Risk Advisory team has been actively assisting a number of Insurance entities, and other entities generally, in ES remediation and advising on and appealing penalty notices. If you'd like to learn more about how Conyers Regulatory & Risk Advisory team can assist, please do reach out. We're always happy to chat.
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.