Both jurisdictions also pledge to sign up to “UK FATCA”
The US Foreign Account Tax Compliance Act, commonly referred to as FATCA, became effective earlier this year, and foreign financial institutions (“FFIs”) in every jurisdiction, including in the British Virgin Islands (“BVI”) and the Cayman Islands, will be required to make certain reports to the US Internal Revenue Services (the "US IRS").
Both the BVI and Cayman Islands Governments have recently announced that they will pursue the finalisation of a Model I intergovernmental agreement (“IGA”) with the United States in response to FATCA. This is welcome news as it will simplify FATCA compliance for a range of BVI and Cayman financial institutions that fall within FATCA’s scope including hedge and private equity funds.
There are currently two model IGAs being considered. Model II, which essentially requires FFIs to report directly to the US IRS, and a Model I which provides for implementation of the requirements through domestic reporting and reciprocal automatic exchange of information based on existing agreements. Model I B is a variation of Model I which is not reciprocal ie the US does not report information to the foreign jurisdiction.
On 4 April 2013 the BVI Government announced that it would pursue a Model I B agreement. This closely followed the announcement on 15 March 2012 by Cayman Islands Ministry for Financial Services that the Cayman Islands would pursue a Model I Agreement. Both announcements had been widely anticipated.
Under the Model I IGA regime, FFIs located in the BVI and Cayman Islands will be required to report FATCA information to the BVI or Cayman Islands Government which in turn will report that information to the United States IRS. The commitment to the Model I IGA has received the widespread support of both the Cayman Islands and the BVI financial services industry, and followed significant consultation between the respective governments and representatives of local financial services industry associations. Fund managers and other offshore users had expressed a general preference to deal with foreign financial institutions that do not report directly to the IRS, but to their home governments.
The new IGAs will sit alongside the BVI’s 22 and Cayman’s 31 existing tax information exchange agreements, including that with United States. Both the BVI and Cayman have also implemented the European Union Savings Tax Directive which has been in place since 2005.
In addition to the Model I agreement with the US, the Cayman Islands Government and the BVI Government also announced that each intend to conclude negotiations to enter into a similar arrangement for automatic provision of information to the United Kingdom. The Crown dependencies of Jersey, Guernsey and the Isle of Man have also committed to the UK to enter into such arrangements. Although, such arrangements have come to be known as “UK FATCA” or “son of FATCA” the actual arrangements will inevitably differ in a number of ways due to the fundamental differences in the UK tax treatment of its residents and citizens compared to the US.
Harneys has been heavily involved in the BVI consultation in relation to FATCA and UK FATCA participating through membership in the Government’s FATCA Focus Group, board membership of the BVI Investment Funds Association, chairmanship of the Securities and Investment Business Advisory Committee and membership of the Financial Services Business Development Committee.