Caymanians who hold US passports will be subject to having their bank accounts and investment information reported to American tax authorities by Cayman banks and investment entities when the US Foreign Account Tax Compliance Act takes effect in 2013.
Although there is hope some of the details of the implementation will change – as they have already since FATCA was enacted in March 2010 – president of the Cayman Bankers’ Association Gonzalo Jalles said the banks will have no choice but to comply and anyone with a US passport will be affected.
“This is coming,” he said. “There’s no way for a carve-out for Caymanians with US passports.”
US citizens, no matter where they live and work, are generally required to file annual tax returns. In addition, US citizens are required to file an annual report detailing foreign financial accounts – including bank accounts – in which they have a beneficial interest.
However, US citizens living abroad are generally exempted from paying taxes on the first US$90,000 they earn, excluding investment income.
FATCA will require foreign financial institutions to report directly to the US Internal Revenue Service certain information about financial accounts that exceed US$50,000 held by those deemed to be “US persons”. Foreign financial institutions that fail to do this face paying a 30 per cent withholding tax on payments made from US financial institutions to foreign financial institutions after 1 January, 2013. Non-US banks, trusts and investment funds are all included in the definition of foreign financial institution.
Two of the basic criteria for determining who is a US person for the purposes of the law is whether someone was born in the United States and holds a US passport.
“Anything that makes us suspect someone is a US person means we have to report,” Mr. Jalles said, adding that it won’t help for Caymanians with US passports to just open their financial accounts with a Cayman passport.
“All passports say where you were born,” he said. “If you were born in the United States, we’re going to assume you have a US passport.”
In addition to being born in the US or holding a US passport, other things that will require financial institutions to report on accounts include holding a US green card; having a US residence address or correspondence address; having standing instructions for transferring funds to an account in the United States; receiving regular directions from a US address; having an “in care of” address or a “hold mail” address as the sole address in respect to the client; or the existence of a power of attorney or signatory on the account granted to someone with a US address.
With the penalty for noncompliance so high, Mr. Jalles said Cayman banks wouldn’t be taking any chances.
“Banks are going to decide to error on the side of providing too much information rather than too little,” he said, noting that many US citizens will have reported the information already on their tax returns or foreign financial account declaration.
“If you’ve been filing, you’re fine,” Mr. Jalles said. “You have nothing to worry about.”
Turning away US clients?
Because of high costs of implementation and maintenance of FATCA, some Swiss banks have decided to close the accounts of those deemed to be US persons.
Mr. Jalles, who is also the CEO of HSBC Cayman, said he didn’t think that would happen in Cayman.
“For [HSBC], it’s not an option,” he said. “Really, for any international bank, it is not an option. Anyone who has a bank in the US has to comply.”
To avoid paying the withholding tax on transfers from the US, foreign financial institutions have to sign an agreement with the US tax authorities and implement certain procedures whether they have any US persons as customers or not. In addition, foreign financial institutions that have investments in the US also have to sign the agreement with the US tax authorities or face the withholding tax.
“You can decide to stop serving US customers, but you’re not going to save much [in costs],” Mr. Jalles said, adding that the Swiss banks that aren’t going to comply with FATCA are generally small and only deal in Swiss Francs.
Because Cayman’s commercial banks have to deal in US dollars – the clearing of CI dollar cheques is done in US dollars and CI dollar cash is purchased from the Cayman Islands Monetary Authority with US dollars – Mr. Jalles doesn’t think banks here could do what some of the Swiss banks are doing.
“I don’t see how any commercial bank here can do that,” he said, adding that it was maybe possible for a Class B bank to not sign on to FATCA.
Brett Hill, president and CEO at Fidelity Bank (Cayman) Limited, said implementing and then maintaining the necessary administrative systems for FATCA would be “hugely expensive” and onerous on banks.
“We will basically all be working for the US [tax authorities],” he said. “It’s almost as if the onus is on the banks to prove a customer is not a US person.”
Mr. Hill said there were approximately 250,000 foreign financial institutions and the US government was hoping to raise $10 billion a year in additional tax revenues with FATCA.
“Maybe the 250,000 FFIs should just pay $40,000 each and be done with it,” he said. “It would cost us less.”
The cost of FATCA is not something a bank can play down, Mr. Jalles said.
“It will be costly, in [HSBC’s] case massive, but implemented globally, so the cost locally will be very manageable,” he said.
Stuart Dack, president and CEO of Cayman National Corporation, said several similar measures in the past – like the retrospective know-your-customer requirements, the European Union Savings Tax Directive and the recent dormant account exercise – will make FATCA easier to handle for Cayman banks than for some other foreign financial institutions.
“I actually think we’re better placed than others, having been through a number of these initiatives already,” he said, noting however, that FACTA would indeed cost money.
“This kind of exercise is a cost of doing business in the world we live in,” he said. “It’s going to cost money. I
t’s difficult to quantify at this point, but I’m not expecting it to cost millions of dollars.”
Mr. Dack noted that the FATCA guidance issued earlier this month already differs from earlier guidance.
He believes that various representations being made will help shape the final provisions of FATCA into something that is workable.
“I think over the next few months there will be some shifting,” he said, “and we’ll end up with something that is sensible.”
Although he believes people should be aware of the measures, they need to realise there will likely be significant changes.
“It’s very important not to knee-jerk at this stage, but it needs careful consideration,” he said. “We don’t want to send a panic around. Absorb the information that is available now, but be conscious that the definitive way this will be implemented hasn’t been resolved.”
Mr. Jalles said the Bankers Association can provide feedback, just as the jurisdiction could do as a whole.
“Just because our voice is little, doesn’t mean we shouldn’t [make representations to the US government],” he said. “We should do it and we will.”
Mr. Hill said that part of the issue was caused because the United States was the only country that taxed its citizens no matter where they lived, something some people would like to see changed.
“We still have a vain hope that someone is going to stop this madness,” he said.