Article by Anthony Fantasia and Amanda Kong

Posted by Cayman Finance

For those in the financial services industry, the US Foreign Account Tax Compliance Act (FATCA) is most certainly not news. The act, which was conceived in 2010 as part of the Hiring Incentives to Restore Employment Act (HIRE), aims to encourage foreign financial institutions (FFIs) to identify and report US persons holding assets offshore by imposing a punitive 30% withholding tax on US source payments to non-cooperative foreign entities. To say the least, FATCA was met with widespread incredulity by the industry.

Since 2010, the Internal Revenue Services (IRS) and the US Treasury have released several notices and a set of proposed regulations to satisfy the burgeoning anxiety amongst financial institutions surrounding the implication of FATCA on their business, culminating in the release of what were purported to be final regulations on January 17, 2013. Yet, the successful institution of FATCA required the support of the international community. To this end, the IRS collaborated with foreign governments in order to address the legislative hurdles which FATCA faced. The solution to these hurdles came in the form of the Model I and II intergovernmental agreements (IGAs).

FATCA has served as a catalyst for other developments in the area of transparency and exchange of information. Examples include the IGAs as well as a recent initiative announced by the OECD to introduce a Common Reporting Standard (CRS) for automatic exchange of financial account information. The Cayman Islands, having already committed to FATCA, has laid the foundation for and is expected to evolve with, the OECD standard and other exchange-of-information initiatives in the future.

Intergovernmental Agreements

Since its inception, FATCA has progressed to what could only be described as a global tax- information-reporting phenomenon, exemplified by the issuance of the model IGAs. In addressing the implementation of FATCA through the IGAs and the final regulations, the IRS and US Treasury claimed to have adopted a risk-based approach. Their aim was to address policy considerations and eliminate unnecessary burdens whilst building on existing practices and minimising operational costs associated with collecting and reporting the information which FATCA requires.

To this end, the two Model IGAs were developed to facilitate the exchange of information without the need for a tax-information- exchange agreement (TIEA), and provide, in some instances, a mutually beneficial relationship. As bilateral agreements, IGAs remove many of the legal impediments presented by a global information- sharing system and further allow for alignment and coordination with local reporting practices.

The Model I IGA places the onus on the local authority of the signing jurisdiction to govern and enforce FATC A as it pertains to the financial institutions therein. In so doing, an FFI will not need to enter into an FFI Agreement with the IRS but will, instead, register with the IRS and then report via their local authority. The Model II, on the other hand, will require FFIs within the signing jurisdiction to still enter into modified FFI Agreements with the IRS and report directly to the IRS. These IGAs were updated on May 9, 2013, most notably to accommodate jurisdictions which do not have a preexisting TIEA or bilateral income tax treaty. The UK became the first country to sign an IGA with the US, entering into a Model I IGA on September 14, 2012. Since then, 18 additional countries have entered into Model I IGAs with the US whilst three countries have signed Model II IGAs. On November 29, 2013, the Cayman Islands signed a Model 1B IGA in its continued efforts to cooperate with the US on tax matters. Additionally, the 2001 TIEA was replaced by a new TIEA which sets out the legal channels through which tax information may be automatically exchanged.

Cayman Islands: Model 1B IGA

In keeping with other IGAs, Cayman’s IGA applies to all financial institutions (FIs) as defined in Article 1 of the agreement. As such, all FIs will need to report US reportable accounts annually to the Cayman Islands Tax Information Authority (TIA). However, an FI will not need to review or report accounts as US reportable accounts, below the de minimis thresholds set out in Annex I of the agreement. Further to this, certain FIs may be classified as “Non-Reportable Cayman FIs” under Annex II of the agreement. These FIs, whilst they are not required to report accounts to the TIA, will still need to certify their status as meeting the requirements.

In some respects, the IGA alleviates many of the issue about which FIs were concerned. The IGA, as it stands, provides relief from withholding or closing accounts held by recalcitrant accountholders. The agreement further allows FIs to rely upon third-party service providers to fulfill their obligations under FATCA. However, in doing so, an FI does not waive its responsibility as a reporting FI.

Yet, for organisations that operate in multiple jurisdictions, the IGA provides an additional layer of complexity to remediation, implementation and reporting under the act, which by itself is already rather multifaceted. To this point, the Model IGAs leverage the definition of an investment entity used in the final regulations with several modifications, and also add and modify certain categories of deemed compliant status. In addition, the IGAs only provide a framework and it is envisioned that enabling legislation and guidance will need to be developed locally in order to implement FATCA.

So, what does this all mean for FIs on a practical level? Based on IRS Notice 2013-43, reporting FIs in Model 1 countries have a deadline of December 22, 2014 to register with the IRS and receive their Global Intermediary Identification Number (GIIN) in order to be included in the first 2014 list. Further, the verification of a GIIN is not required for a Model 1 Reporting FI prior to January 1, 2015 but FIs must register and obtain a GIIN before July 1, 2014 if they meet certain criteria –

They have branches (other than a limited or US branch) in jurisdictions that do not have a Model I IGA;

They are a qualified intermediary, withholding foreign partnership or withholding foreign trust and they are renewing that status; or

They will be the lead FI for member FIs which are not operating in a jurisdiction with a Model 1 IGA.

In addition to registration, reporting FIs will need to ensure that all existing US reportable accounts are identified, and relevant up-to-date documentation received. Further to this, FIs will need to establish policies and procedures, as well as revise any pertinent documentation, to accommodate compliance with the IGA and FATCA. These policies and procedures will encompass expanded due diligence; annual reporting; withholding on passthru payments, where applicable; and institutionalising waiver requirements, where necessary. As part of this process, an FI’s systems will need to be updated in order to facilitate the necessary procedural changes and additional data requirements. Although reporting FIs can look to the final regulations and the IGAs to start to develop these requirements, local guidance is going to provide the details.

To conclude, Cayman’s Model 1B IGA has provided further direction to the local financial services industry in its efforts to prepare and implement the impending changes which FATCA requires. However, enabling legislation and guidance will still need to be enacted by the Cayman Islands Government to bring it into effect and allow for further delineation of how FIs will interface with the TIA. In the meanwhile, FIs should seek to complete the remediation and implementation of their documents, procedures and systems as FATCA is indeed here.

About the Authors

Anthony Fantasia is a Partner with Deloitte in the Cayman Islands and the leader of their Caribbean and Bermuda Cluster’s Tax wPractice. He facilitates clients’ tax reporting, provides tax-advisory services and assist clients in tax-efficient structuring. He also serves as the FATCA service line leader for Deloitte’s Cayman Islands practice.

Amanda Kong is a Manager with Deloitte in the Cayman Islands, working in Financial Advisory. She has gained over seven years’ financial services experience working in the Cayman Islands, the UK, the US and Canada in a wide variety of areas, including FATCA and anti-money laundering

IMAGE: http://www.acfcs.org

See also related iNews Cayman story published May 4 “Private Funds, the Cayman Islands IGA and FACTA” at: http://www.ieyenews.com/wordpress/private-funds-the-cayman-islands-iga-and-facta/