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Cayman Islands and United States Sign FATCA Intergovernmental Agreement

In the latest FATCA news, the Treasury Department announced it signed an Intergovernmental Agreement (IGA) with the Cayman Islands on November 29, 2013. The much anticipated agreement is a significant milestone for Cayman Foreign Financial Institutions (FFIs), including investment funds, enabling them to become “FATCA compliant” without having to enter into an FFI Agreement and report direct directly to the IRS.  Instead, FFIs organized in the Cayman Islands will be required to report directly to the Cayman Islands Tax Information Authority who will then share the information with the IRS. The Cayman Islands will still need to enact local law in order to implement its obligations under the IGA. 

One of the most significant ramifications of this IGA is that Cayman investment funds with no U.S. source income subject to FATCA withholding, who may have otherwise considered not becoming FATCA compliant, will now have to do so under Cayman Islands law.

The Cayman IGA provisions are designed to achieve the same purpose as the FATCA Treasury regulations -- reporting to the IRS on the foreign financial accounts of U.S. persons. The highlights include:

  1. The Cayman Islands must obtain and exchange information on each U.S Reportable Account for each Reporting Cayman Islands FFI. This will generally include the name, address, U.S. TIN of each Specified U.S. person, account number, account balance or value, and the gross amount paid or credited to the account, including redemption payments.
  2. Each Reporting Cayman FFI willnotbe subject to U.S. withholding as long as it complies with the reporting rules and:
    1. Identifies U.S. reportable accounts and annually reports  the required information to the Cayman Islands Tax Information Authority or its delegate
    2. For 2015 and 2016, reports annually to the Cayman Islands Tax Information Authority the name of each Nonparticipating Financial Institution to which it has made payments and aggregate the amount of such payments
    3. Complies with the registration requirements on the IRS FATCA registration website (www.irs.gov/fatca)
    4. If the Reporting Cayman FFI is a flow-through entity for U.S. tax purposes and makes (or is deemed to make) a FATCA withholdable payment to a Nonparticipating FFI, that the Reporting Cayman FFI provides information (e.g., amount allocable to Nonparticipating FFI) to the immediate payor of such income so that the latter properly applies FATCA withholding thereto.
     
  3. The Reporting Cayman FFI will not have to withhold on, or close the account of, a recalcitrant account holder (as defined under IRS regulations) if the IRS receives certain information from the Cayman Islands Tax Information Authority with respect to such account.

As usual, the devil is in the details. Annex I of the IGA sets forth in great detail the due diligence procedures that a Cayman FFI must undertake in order to identify and report on U.S. accounts. A prominent focus of these procedures is the search in the Cayman FFI’s records for “U.S. indicia” that may contradict an account holder’s claim to be foreign.   The due diligence process for a particular account will differ depending on whether the account is held by an individual or an entity, its value, , and if it was in existence on June 30, 2014. Annex II of the IGA specifies entities that are exempt from FATCA (i.e., Non-Reporting Cayman FFIs). Examples include certain governmental entities, international organizations, central banks, and various types of retirement funds.

What should Cayman funds do now? 

  1. Start the registration process via the IRS FATCA web portal. Though the IRS will not allow finalization of the registration or issue a Global Intermediate Identification Number (GIIN) prior to January 1, 2014, starting the process prior to the year-end reporting season is a useful step which might bring to surface certain issues not previously considered. The IRS will publish its first list of FFIs which are FATCA compliant on June 2 and, in order to be on that listregistration must be completed by April 25, 2014.
  2. A fund should select a “responsible officer” to sign off on the registration and be responsible for ongoing compliance, which requires periodic certification.
  3. Finalize a FATCA action plan which includes details on who, how, and when the complex due diligence steps will be performed.

For our recent FATCA articles, please see:

FATCA Update -IRS Issues Draft Agreement for Foreign Financial Institutions
IRS Issues Revised Timeline and Other Guidance Regarding the Implementation of FATCA
Preparing for FATCA: An in-depth discussion of the issues, timeline and action plan for funds  

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