From pwc

In brief The Cayman Islands government recently approved the Tax Information Authority (International Tax Compliance) (Common Reporting Standard) (Amendment) Regulations, 2016 (Second Tranche). The primary purpose of the Second Tranche is to ensure effective implementation of the Common Reporting Standard (CRS) by financial institutions (FIs) in the Cayman Islands.

Approval of the Second Tranche follows the release of draft changes to the CRS Regulations which were provided for comments in November 2016. The Cayman Islands also released the Appendix to Industry Advisory (Appendix) to the Second Tranche of the CRS Regulations which summarizes the changes to the original CRS Regulations and provides guidance on the following areas that are of particular relevance to Cayman FIs (CFIs) and their principals, investors, agents, and clients. The clarifications and additions include:

 the notification requirement for CFIs,

 CRS policies and procedures,

 return filing requirements for Cayman Reporting FIs (CRFIs), including guidance relating to the use of separate jurisdiction reporting, and

 offenses and penalties for contravening the CRS regulations. A revised version of the CRS Guidance Notes and an updated Cayman Automatic Exchange of Information (AEOI) Portal User Guide are expected to be available during the first quarter of 2017.

In detail Background CRS is the global standard in the automatic exchange of information between taxing authorities. It is designed to prevent tax evasion in an increasingly globalized world while also attempting to maximize efficiency and minimize an FI’s information reporting costs.

CRS is based extensively on the Model 1 intergovernmental agreement (IGA) approach adopted by various jurisdictions to implement the Foreign Account Tax Compliance Act (FATCA) with the United States. The main differences between CRS and FATCA are the multilateral nature of CRS, US taxation on the basis of citizenship and residency rather than just residency, and the imposition of a withholding tax for FATCA, but not for CRS.

The Cayman Islands is one of 54 jurisdictions that committed to the adoption of CRS with the first information exchange between governments occurring in 2017 with respect to calendar year 2016 information. CRS is implemented in the Cayman Islands through the Tax Information Authority Law and the CRS regulations, Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations, 2015 (the Principal Regulations), which originally came into force on January 1, 2016. As part of the implementation of CRS in 2017, the Tax Information Authority (Authority) issued the Second Tranche, which addresses CRS compliance and enforcement in the Cayman Islands.

Observation: Cayman Islands has adopted the wider approach to documentation and therefore CFIs must identify the tax status of all account holders and controlling persons, not just account holders and controlling persons that appear to be reportable

Obligation to notify The Second Tranche requires all CFIs to complete a notification by April 30, 2017 using the Cayman AEOI Portal. CFIs that previously completed notifications for FATCA or UK Crown Dependencies and Overseas Territories (CDOT), must update their notifications to confirm their CRS status and to provide additional required information, including, but not limited to, a second point of contact whom the CFI has authorized to file change notices for the principal point of contact.

Each CFI that previously has not completed the online notification for FATCA or UK CDOT (e.g., sponsored entities for FATCA or UK CDOT) must complete the notification. A unique FI number will be assigned upon successful submission of the notification.

Observation: The request for a second point of contact seems intended to address situations where the primary point of contact changes (e.g., resigns or transitions to another role) and the Cayman Islands authorities are not notified.

The Appendix also notes that the definition of ‘non-reporting FI’ under the CRS regulations is more limited than under the US-Cayman IGA such that certain entities classified as either exempt beneficial owners or nonreporting FIs under the US-Cayman IGA now will be classified as CRFIs and have CRS notification and reporting requirements. The Cayman Islands notes that the OECD Global Forum is considering whether limited life debt investment entities (certain types of securitization vehicles) should be treated as non-reporting.

Policies and procedures

While the Principal Regulations required each CRFI to have policies and procedures for compliance with the CRS regulations, the Second Tranche clearly requires that such policies and procedures be in written form (e.g., a policies and procedures manual). The Principal Regulations did not include this written form requirement. Moreover, the Second Tranche emphasizes that such written policies and procedures should address an institution’s obligations regarding due diligence, record keeping, filing information or change notices and annual returns via the Cayman AEOI Portal, and the appointment of third-parties to fulfill a CRFI’s CRS obligations. Cayman authorities expect a CRFI to produce its written policies and procedures and will require the CRFI to explain any non-compliance with its policies and procedures.

Jurisdiction-by-jurisdiction reporting for 2017 and nil returns

The Appendix indicates that, at least for 2017, CRFIs will need to submit, via the Cayman AEOI Portal, a separate return with respect to each reportable jurisdiction for which it has reportable accounts under CRS.

Observation: The time and effort involved in reporting in the Cayman Islands is likely to increase significantly, at least in 2017 for 2016 reportable accounts.

The Second Tranche also requires a CRFI to file a nil return with respect to those reportable jurisdictions for which it had no reportable accounts. The Principal Regulations did not require such nil reporting.

Observation: Given the requirement for separate returns with respect to each jurisdiction for which a CRFI maintains reportable accounts, stakeholders have expressed concerns as to whether a nil return needs to be filed on a jurisdiction-by-jurisdiction basis. However, it is anticipated that a single check box will be used to make a nil return with respect to all reportable jurisdictions for which a CRFI has no reportable accounts under CRS. The submission of XML files or manual entry nil returns will not be required in this instance.

Enforcement

One of the most significant additions provided in the Second Tranche is the establishment of an offense and administrative regime that gives the Authority the power to penalize individuals and institutions that contravene the regulations.

Offenses by individuals

A person commits an offense under the Second Tranche if any one of the following are met:

 The person signs or otherwise positively affirms a false selfcertification and gives that selfcertification to a CFI. The offense is committed regardless of whether the self-certification was signed or affirmed outside the Cayman Islands, the self-certification was given to the FI by the person or a third-party acting on their behalf, or the person knew or had no reason to know that the selfcertification was false.

 The person, in purported compliance with the regulations, intentionally gives the Authority materially inaccurate information.

 The person or a third-party authorized or counselled by the person alters, destroys, mutilates, defaces, hides, or removes information in a way that causes that person or anyone else to violate the regulation in relation to the information.

Offenses by institutions

A CFI commits an offense if it violates any of the provisions of Part 2 of the Second Tranche. For example, a CFI commits an offense if it:

 fails to establish, maintain, implement, and comply with written policies and procedures,

 fails to provide an information or change notice to the Authority with the required information and in the prescribed manner,

 fails to file an annual return and required information (including nil returns) with the Authority,

 files a return with the Authority containing information that it knows or had reason to believe was materially inaccurate, in doing so contravened its own policies and procedures, and behaved fraudulently, intentionally, negligently, or recklessly,

 fails to notify the Authority as soon as practicable after the discovery that it filed a return which contained inaccurate information,

 fails to retain appropriate documentary evidence for six years that relates to the information required to be reported to the Authority, or

 fails to provide information required on a notice issued by the Authority.

Observation: Directors, limited liability company members, general partners, and certain other individuals are liable where their CFI commits an offense, unless such persons can demonstrate they exercised reasonable due diligence. It still is unknown how the Government of the Cayman Islands will attempt to penalize those individuals who are not residents of the Cayman Islands.

Penalties The Second Tranche also grants the Authority power to impose the following primary penalties for the offenses previously described:

Body corporate or individual who forms, or forms part of an unincorporated CFI up to 50,000 KYD

Otherwise up to 20,000 KYD

There is an additional 100 KYD penalty for each day the violation continues.

Interest accrues at daily rates and as compounding interest. The rate is the higher of 5% or the average consumer price index plus the inflation rate for the most recent three calendar years.

Observation: Interest accrues on all or part of an unpaid penalty; both the penalties and related interest are considered a debt to the Crown.

Time limitations The Authority cannot impose on a CFI a primary penalty for an offense that violates any of the provisions in Part 2 of the Second Tranche more than one year after becoming aware of the violation.

The Authority also cannot impose a primary penalty for other offenses after the earlier of one year of becoming aware of the violation or six years after the violation.

There is no time limitation for imposing a continuing penalty where a penalty has been imposed by the Authority, the violation has not been remedied, and the party is capable of remedying the violation.

Defense Any defendant found to have committed an offense has a defense if he or she has reasonable cause.

Observation: The addition of potential fines and penalties was likely, but the expansiveness of the Authority’s powers to impose fines and penalties was unexpected. The filing of a false self-certification and the provision that the penalty can be imposed regardless of whether the person knew that the self-certification was false, along with the potential for the directors, general partners, and other individuals of non-compliant FIs to be fined will have far reaching effects on the role these individuals play and their level of involvement in the application of CRS.

The takeaway The increased scope of the CRS requirements for written and expansive policies and procedures and the additional nil filing requirement are indicative of the Cayman Islands’ next level of preparedness as a reporting jurisdiction to perform CRS compliance audits. CRFIs should take immediate action to access their compliance with these rules and take appropriate compliance actions considering the immediate effectiveness of the Second Tranche and the beginning of the CRS reporting preparation process.

For a more in-depth discussion of how this development might affect your business, please contact:

Dominick Dell’Imperio (646) 471-2386 [email protected]

Candace Ewell (202) 312-7694 [email protected]

Richard E Irvine (441) 299 7136 [email protected]

Scott Slater (441) 299 7178 [email protected]

Robert Limerick (646) 471-7012 [email protected]

Lisa Hagedorn (312) 298-4952 [email protected]

Erica Gut (415) 498-8477 [email protected]

Adam Cook (345) 914-8617 [email protected]

Jon Lakritz (646) 471-2259 [email protected]

Alexander Belich (345) 914 8608 [email protected]

SOURCE: http://www.pwc.com/us/en/tax-accounting-services/newsletters/global-information-reporting-withholding/assets/pwc-cayman-regulatory-amendments-for-crs-compliance-and-enforcement.pdf