Similar arrangements will apply to information exchange with the UK
Following a consultation of the financial services industry and negotiations with US officials, the Cayman Islands government confirmed it will conclude a Model 1 intergovernmental agreement with the US in response to the US Foreign Account Tax Compliance Act.
Under FATCA, foreign financial institutions are expected to sign an agreement with the US Internal Revenue Service identifying any American person accounts and to report certain information on an annual basis. In addition, foreign financial institutions will be required to report details to the IRS regarding substantial American owners of non-financial foreign entities unless an intergovernmental agreement is signed. Because FATCA is applied extraterritorially outside the US, it falls foul of many local privacy laws and other regulations. The US government has therefore offered two alternative forms of implementation through intergovernmental agreements. Under Model 1 foreign financial institutions will report to their home government, which then relays the requested information to US authorities. The Model 2 agreement in contrast requires foreign financial institutions to enter into direct agreements with the IRS and file reports directly with the IRS.
Minister for Financial Services Rolston Anglin said in the Legislative Assembly on Friday, 15 March, that the agreement between Cayman and the US for the exchange of information ensures that business in Cayman will continue to operate and compete effectively with that of its global counterparts. It also underscores the islands’ positive reputation regarding transparency and exchange of information for tax purposes, he said.
“The global landscape in taxation is changing at an unprecedented pace,” Mr. Anglin said. “The modern cooperative and transparent jurisdiction will be one that uses automatic exchange of information mechanisms and multilateral approaches in tax matters, and that demonstrates effectiveness in the implementation of these measures.”
Mr. Anglin added the decision will apply to a similar arrangement for the automatic exchange of certain information with the United Kingdom, and that he expects final negotiations on the mechanisms for exchange with the US and the UK to conclude quickly.
The commitment to the Model 1 IGA has received the widespread support of Cayman’s financial services industry, and followed significant consultation between the government and representatives of local financial services industry associations.
In January, the Cayman Islands Director’s Association expressed its support of the Model 1 agreement based on a survey of its membership. Association president Paul Harris said the Model 1 intergovernmental agreement has the benefit that foreign financial institutions would report to the Cayman Islands government rather than having to deal directly with the IRS, including the need to enter into an agreement with the IRS.
There is a belief in the financial services industry that fund managers and other offshore users would prefer to deal with foreign financial institutions that do not report directly to the IRS, but to their home governments. As a consequence some may relocate to Model 1 jurisdictions if Cayman did not enter such an agreement, the association said.
Offshore law firm Walkers stated in a client advisory that the adoption of the Model 1 IGA “represents the most efficient response for stakeholders in Cayman financial services and will now allow investment managers and their advisors to proceed with plans for implementation of FATCA with certainty that Cayman will enter into the Model 1 IGA”.
Mr. Anglin thanked the financial services industry associations for their feedback and Cayman Finance for providing a consolidated position and analysis of the different alternatives.
Cayman Finance CEO Gonzalo Jalles said the organisation is committed to working with government on the implementation of FATCA, and that the decision-making process was a good example of how Cayman’s public and private sectors effectively work together.
“I encourage industry to devote the necessary resources and remain very involved in the implementation of FATCA,” Mr. Jalles said. “While the Model 1 IGA has extended deadlines in some areas, this still will be a very significant undertaking that demands substantive action from all industry participants in the coming months.”
Mr. Anglin added: “This decision to adopt the Model 1 IGA will fortify our good standing in the global community and continue to build on the solid foundation we already have in place with our existing agreements.”
Minister Anglin also noted the 30 tax information exchange agreements Cayman has concluded and its role as a member of the Steering Group and the Peer Review Group in the Global Forum on Transparency and Exchange of Information for Tax Purposes.