Cayman Islands: Navigating The Complexities Of International Tax Compliance

Introduction

Recently, the Cayman Islands Department of International Tax Compliance (DITC) notified financial institutions that in October 2015 it will be introducing local regulations to implement the OECD’s Common Reporting Standard (CRS), also commonly referred to as global FATCA or GATCA.

That notice also served as a reminder that international tax compliance is about to get even more complicated for the thousands of hedge funds, private equity funds, special purpose vehicles and other entities that are Cayman Islands Reporting Financial Institutions (RFIs) who have had to sort through and comply with the complexities of FATCA, the US Foreign Account Tax Compliance Act. FATCA was enacted by the US authorities in 2010 and is designed to combat tax evasion by US account holders. FATCA requires reporting of foreign financial accounts and assets, by both individuals and entities.

CRS builds upon FATCA, by requiring that financial institutions report on accounts of individuals and entities of specific jurisdictions that have signed on to the CRS, under their jurisdictional laws. As the Cayman Islands are an early adopter, CRS begins with a phased implementation, starting on January 1, 2016.

It is not that CRS is new; Cayman RFIs, just like their counterparts in other jurisdictions around the world, have known about CRS at least since 2014 – just as they would have known about UK FATCA, since the United Kingdom signed on to and adopted US FATCA and in the process, enjoined all of its overseas territories (such as the Cayman Islands) and Crown Dependencies into complying with the law.

The successful implementation of FATCA and its general widespread acceptance by governments around the world has meant that financial institutions everywhere have been faced with a cascading series of international tax compliance obligations, an equal opportunity burden shared by governments, financial institutions and even individuals.

These tax compliance obligations have come with varying degrees of complexity, and with a significant level of change to the way that financial institutions, individuals and even governments can conduct business in this new era of international tax information exchange.

Moving From Complexity To Implementation

Quite understandably, FATCA was seen as inordinately complex when first introduced, not least because of the unprecedented global reach and the very stringent sanctions attached to its requirements, but taking the necessary steps to comply appeared daunting, and the very human tendency to procrastinate certainly factored into the initial responses to it.

Shifting Deadlines

Since July 2014, albeit with a limited scope, FATCA has been in effect. But even so, there have been shifting deadlines to its reporting obligations, as governments try to come to terms with the requirements.

There are several cases in point here. The Cayman Islands DITC twice delayed the deadlines for notification and reporting, with the last extension moving the notification date to May 31 and the reporting deadline to June 26, 2015.

In the British Virgin Islands (BVI), technical problems with their FATCA portal led shifting deadlines for enrolment applications via the BVI Financial Account Reporting System (BVIFARS). This was delayed from the original date of June 1 to a new date, June 30. The FATCA reporting deadline was also changed from June 30 to July 31.

There were also implementation delays in Singapore, where FATCA reporting is now required to take place by July 31. Luxembourg and Ireland also delayed their reporting deadline, and the lists goes on.

Despite any initial angst, FATCA has been rolling on and is now regarded as the model for the implementation of the CRS.

Enter CRS, And New Layers Of Compliance

With CRS expected to be implemented in 2016, at least among those “early adopter” countries, financial institutions must now be preparing to meet new deadlines in a matter of months. By January 1, 2016 when CRS takes effect, RFIs will need to perform new account onboarding. By December 31, 2016, due diligence and review of high value individual accounts should take place. The first exchanges of information will take place in September 2017 and by December 31, 2017, the review of low value accounts and entity accounts should be completed.

Given the delays that took place with FATCA, financial institutions may be forgiven for thinking that similar delays may accompany CRS implementation. They should not count on this however, and should start preparing for the multiple reporting obligations that CRS will bring.

Unlike FATCA – which has reporting requirements only to the US ultimately, whether directly ( via Model 2 Intergovernmental Agreement) or indirectly through local tax authorities ( via Model 1 Intergovernmental Agreement), CRS requires reporting to multiple jurisdictions, which will be facilitated through bilateral or multilateral agreements.

The OECD’s Multilateral Competent Authority Agreement (MCAA) is signed between Competent (Tax) Authorities of participating jurisdictions. That means multiple Competent Authorities, in multiple jurisdictions, rather than between two governments (as with FATCA).

The MCAA is activated when each Competent Authority provides the OECD with confirmation that they have the necessary legislation in place to implement the CRS and have specified the relevant effective dates with respect to Preexisting Accounts, New Accounts, and the application or completion of the reporting and due diligence procedures.

CRS Reporting Requirements

While CRS mirrors FATCA’s Model 1 IGA to some extent, reporting requirements support a global exchange of information, and in this regard CRS differs from FATCA. CRS requires financial information from account holders (individuals and entities) that are tax resident in other participating jurisdictions, and includes account balances or value, interests, dividends, income from insurance products and sales proceeds from financial assets, inter alia .

Counting The Cost

The cost of complying with these various international tax compliance obligations has given many governments and financial firms new considerations regarding personnel costs, technology and software investment, data retention, storage, and security.

In November 2014, a Thomson Reuters survey of some 300 financial organizations revealed that 55 percent of them expected to surpass their FATCA budget. The survey was taken during a webinar on FATCA reporting and also showed that more financial institutions were beginning to appreciate the level of cost that would be involved in their 2015 FATCA compliance.

In many instances, governments, such as in the Cayman Islands and BVI, have had to implement entirely new technology systems/portals to cope.

Financial firms also find themselves having to reorganize themselves operationally to add new personnel, technology systems, consultants, and even make provisions for extra legal costs.

Others have opted not to handle this in-house and have instead engaged with service providers who can provide outsourced solutions. However entities choose to handle these new obligations, what they must ensure is that they are current and up to speed with the ever-changing landscape of these regulations.

Another cost that firms have had to factor into the equation is that of data storage, given the volume of reporting data being generated as a result of these international tax regulations. In some instances, retaining the data is crucial to proving compliance, should questions arise. For example, in the Cayman Islands, reporting financial institutions (for FATCA) are required to retain all books, documents and other records, which the Tax Information Authority can inspect or request. Intentional destruction or removal of evidence and willful obstruction of the Tax Information Authority’s inspection are each criminal offenses.

Data security and its attendant cost are becoming a particular concern, with the growth of international tax compliance. For CRS, each tax authority and the Competent Authority in a particular jurisdiction must specify the methods for data transmission including encryption, any safeguards for the protection of personal data and confirm that it has in place adequate measures to ensure the required confidentiality and data safeguards standards are met. These are all considerations for governments and financial institutions who are responsible for meeting the costs of ensuring the safe transfer of clients’ data to the various tax authorities in participating jurisdictions.

While these additional compliance costs may seem high, ultimately getting this wrong poses a greater threat to a Fund’s standing as regulators in over 50 countries will now have their eyes focused on RFIs and those who are making a good faith effort to comply.