Regulation FATCA is here, be ready

On 15 March the Cayman Islands Government announced its intention to sign an agreement with the US authorities to adopt a Model 1 Intergovernmental Agreement (IGA) in response to the US Foreign Account Tax Compliance Act. Cayman Finance analysed the different routes to implement FATCA and after including wider industry feedback recommended government concludes the Model 1 IGA. FATCA CEO Gonzalo Jalles explains what the agreement means for Cayman. 

FATCA means that US authorities will be receiving information of every account that has a US link, says Jalles. This includes but is not limited to persons born in the US (even if they have never lived in the US), any account with a US address, any account with a US person as signatory, etc. “In fact, if the financial intermediary has a suspicion of US indicia, it is forced to enquire with the customer and, if not satisfied, to report the account,” he says.  

While small accounts are not subject to reporting, the threshold is very small for a country like Cayman with one of the highest per capita incomes in the world, and the account should be reported if at any point in time during the year the threshold was exceeded, so playing with month or year end balances would not help. 

“It is expected this information will be used to cross-reference against tax filings of the individuals, and as such, if anyone thought (incorrectly) a Cayman bank account could be used to hide taxes, it will most certainly now be absolutely impossible.” 

Jalles says from Cayman Finance’s perspective Cayman implemented FATCA first and foremost because “we do not want anyone to use Cayman to evade taxes”. “We have demonstrated during the last years a consistent desire to help other countries enforce their tax laws.” 

If the Cayman government had not signed an agreement, the financial institutions that FATCA aims at would have had three choices: sign an agreement themselves, pay a 30 per cent withholding tax in every US dollar transaction or not use US dollars any longer.  

“For Cayman’s financial industry options two and three are simply not feasible,” says Jalles.  

From an industry perspective signing an intergovernmental agreement has also significant reputational benefits and simplifies some of the aspects of implementing FATCA compared to signing direct contracts between the companies and the IRS. 

While the current agreement applies only to an information exchange with the US, the Cayman Islands government announced a similar agreement will be concluded with the UK as well, after the UK called for a similar reporting system with regard to accounts that have a UK link. 

“At the moment the UK has not attempted to force similar reporting from other countries; however, although the UK has a strong currency, it is not considered the world’s reserve currency, and if it were to try to implement FATCA legislation, it is likely some countries would not sign and many companies would choose to not use the pound sterling any more,” Jalles says.  

Similarly, it is unlikely other countries could implement the kind of reporting FATCA requires the way the US has done it.  

“It is clear the world is moving towards automatic exchange of information, but it is unlikely we will see a replication of FATCA on a country-by-country basis. I would expect the implementation of future proactive reporting initiatives would come as a consequence of multilateral negotiations,” he adds. 

This reporting, however, does not mean that Cayman’s financial industry is threatened in any way. Jalles notes a misconception that Cayman’s financial industry is built around some kind of secrecy or tax evasion structure. “Nothing could be further from the truth. Our financial industry provides a tax efficient structure for transactions.” 

“Tax efficient”, he says, is not a fancy word for tax evasion, but means each investor or investment pays the appropriate taxes in the place where the investor is based or the investment is made without creating a second layer of taxes. 

Cayman’s financial industry will mainly be affected by FATCA because it is complex and costly to implement. Financial intermediaries all around the world are currently devoting significant resources to its implementation, and this factor cannot be ignored, Jalles says. But it is a cost that will affect all financial industries around the world. “So from a competitive perspective, I don’t expect it to be a negative factor for Cayman’s financial industry.” 

It may even have a positive effect, he adds, because FATCA will eliminate many of the mischaracterisations of Cayman. “I expect more businesses will not be discouraged by the media and will consider Cayman as beneficial jurisdiction to conduct international business.” 

Institutions and individuals with a link to the US need to be ready for FATCA, Jalles advises.  

“If you are an individual with any link to the US or any member of your immediate family does and you have not been filing US tax returns, you have some serious and expensive work to do. 

If you are a company that may be considered a financial intermediary (and this is much wider than banks), implementing FATCA is something you should have been working on for the last several months if not years,” he says. 

“If you are a company that is not an intermediary, but you have a signatory, an address, operations, a director, a significant shareholder, etc with a US link, FATCA may affect you, seek advice.” 

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