While Washington tax authorities have conceded some breathing space, Tuesday is expected to mark the start of a protracted process that promises uncertainty and expense for anyone with a financial interest in the United States.
The first day of January kicks off the Foreign Account Tax Compliance Act, designed to raise about $800 million per year during the next decade, according to estimates by The Association of Certified Financial Crime Specialists. Those who will need to dig deep are expatriate Americans; dual citizens; Green Card holders; anyone who owns, oversees or controls a US bank account; and anyone who invests in the country or owns US property.
Sceptics have dismissed the sum as negligible in the context of an annual US budget of roughly $3.5 trillion, while the costs of implementation – even apart from additional staffing and resources at the Internal Revenue Service – have been pegged between hundreds of millions of dollars and more than US$10 billion. The “Foreign Financial Institutions” subject to FATCA will have to bear much of the cost of implementation, to the point where many have threatened to discontinue serving US account holders.
Cayman authorities concede negotiations are “sensitive” and last week declined to say much at all about newly looming deadlines. Although they described 1 January as “a trigger” signalling the start of mandatory tax-information reporting, local officials said little has been set in final form.
“It will not be until September 2015 that certain data from the 2013 tax year will have to be reported [to Washington],” said Duncan Nicol, director of the Tax Information Authority, the so-called “Competent Authority” for the Cayman Islands.
The legislation essentially compels US account holders to disclose to the IRS foreign-held assets worth more than US$50,000. Failure to comply can draw a penalty of 40 per cent of the value of an undisclosed asset, while a noncompliant financial institution is subject to seizure of 30 per cent of its income from any US financial asset – plus interest. “This is hugely complex and has a lot of moving parts,” Mr. Nicol said. “It is a global initiative by the US and we are still evaluating the best decisions for the Cayman Islands.”
An original 1 January deadline for foreign financial institutions – including banks, insurance companies, investment funds, family offices, legal firms and other financial services companies – to enter into agreement with the US has been delayed until the end of 2013. An initial model, proposed in February, for transferring tax information to Washington from abroad has been augmented by a second, published in mid-November.
In October, the IRS delayed enforcement of FATCA from 1 January, 2013, to 1 January, 2014, briefly muting some of the protests, and giving those affected by the law time to prepare, a process one New York tax attorney told The New York Times “was mind boggling”.
Still, Mr. Nicol said, even with the delays, addenda, second thoughts and renegotiations, “FATCA is US legislation and we have to deal with it. The only question is how we make this work and how the information will have to be reported”.
Already, France, Italy, Germany, the United Kingdom, Spain, Japan and Switzerland have signed agreements with the Treasury Department as part of negotiations with 47 jurisdictions, including the Cayman Islands, acknowledged by the department – alongside Liechtenstein and Gibraltar – as “tax havens”.
Absent from the US Treasury’s list, however, is China, the world’s second-largest economy. Beijing has told Washington that banking and tax laws “do not allow Chinese financial institutions to comply with FATCA directly”.
Briefly, Mr. Nicol said, the initial “Model 1” for compliance was that domestic financial institutions would report to local authorities, which, in turn, would report that information to Washington. Under “Model 2”, local authorities would direct local financial institutions to report directly to Washington.
He declined to characterise negotiations with Washington as a choice between one or the other model, but rather “evaluating them together and the slightly different technical mechanisms for reporting, for data protection and transmitting information across borders”.
While compliance begins on 1 January, regulations will be phased in through January 2017, although, at this point, Mr. Nicol points out, the final regulations have not been published, nor is there a final list of foreign financial institutions.
Declining to forecast how Cayman might ultimately navigate FATCA, he said negotiations “were at a sensitive point, too sensitive” to discuss.
“It has to do with the global degree of tax exchange, the methods and how fast we can do it,” Mr. Nicol said. “We can’t really go beyond saying at this point that it is happening.”