US tax info exchange deal nears

Scrutiny of the financial affairs of US citizens and US-affiliated individuals in the Cayman Islands has come a step closer as local officials and their counterparts in Washington announced they had initialled tax-information-exchange agreements.

The agreements, while still embryonic, are scheduled for full signatures “as soon as possible, after which the texts will be publicly available”, according to a statement from the Ministry of Financial Services released Tuesday.

The agreements make it mandatory for local institutions to turn over banking and other financial information on thousands of US-affiliated individuals to the US Internal Revenue Service, enabling the federal agency to track and collect delinquent taxes.

Called the Intergovernmental Agreement, Model 1, the document sidesteps Cayman privacy laws by special fiat, obliging local financial institutions to report directly to the Ministry of Finance information regarding “accounts and non-financial entities substantially owned by United States citizens and residents,” Tuesday’s statement said.

Under the “automatic exchange of information” agreement, a vital step toward implementing the Foreign Accounts Tax Compliance Act, the ministry, in its turn, will forward the information to the IRS, which will pursue individuals or businesses judged in arrears.

Bitter controversy continues to surround FATCA, initially legislated in 2010 to address yawning US budget deficits, although the costs of administration versus likely revenues are hotly debated.

In addition, legal questions loom over US Treasury Department reciprocal promises to give foreign governments analogous information about their own account holders at US financial institutions, enabling overseas tax authorities to act against their nationals.

Under US law, however, the promises constitute an international treaty which the Treasury Department is not permitted to create without congressional approval, which has never been granted.

A series of lawsuits in Texas, Florida and Washington, DC, accompanied by US Senate Bill 887, introduced in May by US Senator Rand Paul, a Republican from Kentucky, have sought to overturn reciprocity provisions, although none of the moves is likely to stop FATCA. Additionally, as a tax-free jurisdiction, Cayman does not seek tax information about its own citizens.

Advertising Tuesday’s signing as a boost for industry, the Ministry for Financial Services said “a standardised framework for the reporting of data” was “likely be adopted as a broader template for multilateral [exchanges of tax information] in the future.

“Having a standard mechanism for reporting to Cayman’s Tax Information Authority, which is the sole channel in the Cayman Islands for the provision of tax-related information to other governments,” the release said, “is likely to reduce the administrative costs that would result from foreign financial institutions having to collect and transmit data to other governments on their own.”

During negotiations, the Ministry of Finance’s Tax Information Authority explicitly rejected Washington’s alternative Intergovernmental Agreement, Model 2, allowing foreign financial institutions to report directly to the IRS, bypassing their own governments.

Tuesday’s release quoted Minister for Financial Services Wayne Panton, saying local government was pleased with the agreement because the global community was moving toward standardised tax-information exchanges.

“As an international financial centre that contributes to the efficient functioning of global markets, the initialling and subsequent signing of the IGA and new [Tax Information Exchange Agreement] with the United States will again demonstrate Cayman’s commitment to engage in globally accepted tax and transparency initiatives,” he said.

Washington lawyer James Jatras, however, a leader of vocal anti-FATCA forces, calls the law “fatally flawed”.

“Treasury just doesn’t have the resources to enforce FATCA directly and extraterritorially on hundreds of thousands of [foreign financial institutions] in almost 200 countries. The only way forward is to pressure or entice foreign governments into enforcing FATCA against their own institutions and citizens as effective deputies of the IRS pursuant to so-called ‘intergovernmental agreements’.”

However, Tim Ridley, former senior partner at Maples and Calder and 2004-2008 chairman of the Cayman Islands Monetary Authority, said FATCA was “a done deal”, unlikely to be halted, particularly as various European and UK tax authorities also saw the potential of improving their own tax collections.

“Cayman is going to have to live with this. We cannot opt out,” he said. “What is important now, and what the big global banks and service providers want, is consistency, one system that meets FATCA and similar requirements everywhere. This is intrusive and reduces privacy, but you just have to hold your nose and go through with it.”

Mr. Ridley worried that private financial institutions would pass the additional compliance costs on to their customers, while government would confront ever greater costs in collecting, collating and forwarding thousands of files to Washington and to other jurisdictions that imposed similar FATCA-style regimes.

Ministry of Financial Services spokeswoman Angela Piercy defended the IGA 1 and the tax-information-exchange agreement, saying they are vital to Cayman’s global reputation.

“What sometimes is overlooked by the local and international public is that a jurisdiction’s reputation is irrevocably linked to the type of business that a jurisdiction attracts,” she said. “If a country wants to attract sound, good business, then it must have a favourable reputation.

“Cayman has been able to build a financial services sector that contributes roughly 60 per cent to our gross domestic product precisely because we are known in the circles that matter – including supranational bodies such as the Global Forum on Transparency and Exchange of Information for Tax Purposes, and the Financial Stability Board – as a jurisdiction with internationally recognised, and appropriate, legislation and regulation.”

She added, “Conversely, a jurisdiction that has a negative reputation will attract that sort of business, and with the direction of travel in regard to tax and transparency, it will be difficult for such a jurisdiction to maintain its economy.”