A delegation from the Cayman Islands met with representatives of the United States Internal Revenue Service and Treasury Department on Wednesday to discuss the implementation of the Foreign Account Tax Compliance Act.
For those Americans who have diligently and honestly filed their annual income tax returns, the new tax act will have little effect. For those Americans who have been less than diligent or honest, well… there’s been no real repercussion for that in the past.
That’s going to change.
What’s more, Cayman and its financial institutions have little choice but to comply with the requirements of the act, unless that is, the country can figure out how to run an offshore financial centre without having money transfers go through the United States.
The Cayman Government has vowed to ensure compliance to FACTA, and that means Cayman Islands financial entities – ranging from banks, to trusts to investment funds – will have to sign an agreement with the IRS agreeing to report certain information about accounts held by Americans, or face a 30 per cent withholding tax on payments made from US financial institutions. No bank will pay that tax, so they will have to either comply or do what some Swiss banks have done – close accounts held by American citizens.
There are reportedly more than 6,000 people holding US passports here in Cayman. Many of those people hold dual citizenship. However, dual citizenship does not allow US citizens to escape requirements to file annual income tax returns or to file annual reports on their financial accounts held outside of the United States. Many dual citizens will have to make a difficult decision in the next year or so about whether to renounce their American citizenship or face potentially high tax penalties for failing to comply with filing and reporting requirements, especially if there was an associated tax liability.
Although the IRS and the Treasury Department said FACTA doesn’t single out the Cayman Islands, the screw has been tightened another turn here nonetheless, and this is just another example of why the only way forward for the Cayman Islands financial services industry is through complete openness and transparency.