From Due Diligence

The Cayman Islands was one of the first countries that agreed to FATCA, the Foreign Account Tax Compliance Act. A recent spat between the Cayman Islands and Australia, however, has us wondering if the Caymans will actually enforce the law in the years to come.

FATCA is a 2010 law designed to reduce tax evasion utilizing foreign bank and financial accounts. Under the law, foreign financial institutions must research their account base and report those accounts with ties to the United States. The Cayman Islands signed an intergovernmental agreement with the U.S. Treasury on November 29th, 2013. The FATCA accord was part of a tax information exchange agreement (TIEA) signed the same day.

FATCA is still in its early stages. Banks must now begin reviewing their accounts but no disclosures are required this year. Generally, we expect countries to honor their agreements but a recent dispute between Australia and the Caymans suggests that the Caymans may have no intention of honoring their FATCA obligations.

According to the Sydney (Australia) Morning Herald, in a case of first impression, a judge of the Grand Court of the Cayman Islands told the Cayman Islands Tax Information Authority that the TIEA between the two nations violated the Cayman’s Bill of Rights and federal privacy laws.

Much like our FATCA pact, Australia entered into an information exchange agreement with the Cayman’s tax authority. The law allows either tax agency to seek information from the other if necessary to administer that country’s tax laws. The Australian Tax Office sought information on Vanda Gould, an Australian thought to be banking in the Caymans. Utilizing the exchange agreement, the Cayman Authority agreed to provide the information to Australian regulators.

Gould challenged the disclosure in the Cayman court system. It was the first test of the Tax Information Exchange Agreement and the test failed miserably for the regulators. Not only did the court forbid the exchange of information, the court threatened the Australians for even seeking information. As quoted by the Sydney Morning Herald, Cayman Justice Nye said in his ruling, ”The Commissioner’s staff and lawyers would be exposed to risk of incarceration should any of them decide to visit the Cayman Islands”.

The Cayman Islands is the fifth largest banking center in the world. It has also built a reputation as a tax haven. Although the Cayman government pledged to honor FATCA, the recent decision involving the Australian TIEA suggests the FATCA accord may be in jeopardy. In fact, some in Australia are saying that all tax exchange agreements in the Caymans are in jeopardy. In the words of the Morning Herald, “As G20 leaders prepare for their talkfest… they would do well to ponder this. Even if they were to talk day and night for a year, sally forth with a shipping container brimming with white papers, sign a slew of resolutions and an array of treaties on top, it would hardly put a scratch on the Leviathan that is global profit shifting.”

It’s too early to tell if the Cayman Islands will honor the FATCA agreement with the United States. Uncle Sam is a whole lot better at getting his way, particularly in the Caribbean. While some may view the Australian TIEA defeat as a blow to FATCA, we don’t for one second suggest that Cayman bank accounts are safe from disclosure.

Have an unreported offshore account? The IRS penalties can be devastating. In some situations there may even be criminal penalties.

If you have an unreported account in the Caymans or anywhere else in the world, call us. We are a full service boutique tax law firm that handles FATCA, FBARs and offshore reporting issues. For more information, contact attorney Bethany Canfield at [email protected] or by telephone at (414) 223-0464. All inquiries protected by the attorney – client privilege and kept in complete confidence.

For more on this story go to: http://www.mahanyertl.com/mahanyertl/2014/will-cayman-islands-honor-fatca/

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