UK Enters into Tax Agreements with the Cayman Islands and Other Offshore Jurisdictions

by Dechert LLP
Contact

Banner

The UK and the Cayman Islands recently entered into an agreement to improve international tax compliance (ITC). Similar to the US Foreign Account Tax Compliance Act (FATCA), the ITC imposes wide-ranging UK financial reporting obligations on financial institutions in the Cayman Islands, and may subject non-compliant financial institutions to legal sanctions. The UK has entered into similar agreements with Bermuda, Montserrat, Turks and Caicos, the British Virgin Islands, Anguilla, the Isle of Man, Guernsey, Jersey and Gibraltar. This article focuses on the Cayman Islands ITC, but similar treatment will apply under the agreements with the other jurisdictions.

The ITC and FATCA

The ITC closely follows the US and UK’s FATCA Intergovernmental Agreement (IGA). FATCA aims to prevent tax evasion by US taxpayers through the use of offshore accounts, by requiring foreign financial institutions (FFIs) to report to the US Internal Revenue Service (IRS) certain information regarding US account holders. Non-compliance by an FFI can lead to a 30% withholding tax on US source payments distributed to the FFI. Under the IGA, UK financial institutions must report the information due under FATCA to HMRC instead of to the IRS. HMRC must, in turn, provide this information to the IRS.

Unlike FATCA, non-compliance under the ITC will not lead to withholding on UK source payments. However, failure to provide information may subject a financial institution to sanctions under Cayman domestic law.

Scope of the ITC

The ITC applies to Cayman financial institutions (FIs). The definition of “financial institution” is broad and encompasses most Cayman-domiciled investment funds or funds that have a branch in the Cayman Islands. Cayman FIs will be required to report in respect of UK “reportable accounts”, which are financial accounts maintained by an FI for UK resident individuals and entities.1 FIs will need to go through the procedures described below to determine if an account is a UK reportable account. Reportable information includes the name, address, date of birth and UK national insurance number (where relevant) of the UK account holder, along with the name of the FI and account balance or value. For custodial accounts, the gross amount of interest and gross amount of dividends will also be reportable.

Procedures

The necessary due diligence procedures under the ITC depend on: (a) whether the account is maintained for an individual or an entity; (b) the US dollar value of the account; and (c) whether the account has been “pre-existing” as of 30 June 2014.

Pre-Existing Individual Accounts

For individuals, pre-existing accounts fall into three categories: (i) excluded accounts; (ii) lower value accounts; and (iii) higher value accounts.

FIs have no obligation to review, identify or report “excluded accounts”, which are:

  • pre-existing individual accounts with a balance or value of $50,000 or less as of 30 June 2014;
  • pre-existing individual accounts that are cash value insurance contracts and annuity contracts with a balance or value of $250,000 or less as of 30 June 2014; and
  • depositary accounts with a balance or value not exceeding $50,000.

Lower value accounts are those pre-existing accounts with a balance or value of between $50,000 and $1,000,000. FIs must search electronically maintained data for these accounts for key UK indicators such as UK tax residency, UK mailing or residential address, power of attorney or signing authority in the UK (UK Indicia). Any accounts with UK Indicia must be treated as UK reportable accounts. If any accounts subsequently have any of the above UK Indicia, they must be treated as UK reportable accounts at the date of discovery.

Higher value accounts are those accounts above $1,000,000 in value (HVA). In addition to an electronic search (as above), FIs must search paper records if the electronic database does not capture all of the UK Indicia. Further, FIs must ask any relationship manager responsible for a HVA whether such manager has actual knowledge that the account holder is a UK person/entity. If so, the respective account will be treated as a reportable account. Additional procedures apply to accounts not initially high value but which subsequently become high value.

New individual accounts (those opened on or after 1 July 2014) will be subject to different rules, as follows:

    • There will not be an obligation to review, identify or report depositary accounts and cash value insurance contracts not exceeding $50,000.
    • For all other new individual accounts, a self-certification must be obtained and the FI will need to determine whether the account is a UK reportable account.

Pre-Existing Entity (Non-Individual) Accounts

If the account or balance for an entity does not exceed $250,000 as of 30 June 2014, it will not be subject to review. However, if it exceeds $1,000,000 as of 31 December 2015, the FI will need to determine whether the entity is a UK specified person, by reviewing information maintained for regulatory or customer relationship purposes.

Aggregation of Accounts

In determining an account value or balance, FIs must aggregate all accounts they hold for that entity/individual.

Practical Consequences for Cayman Funds and Other Offshore Funds

Information relating to calendar year 2014 must be provided to HMRC by the Cayman Islands no later than 30 September 2016. No date has been set for the provision of information by FIs to the Cayman Islands Tax Authority, but a working group has been established to finalise the domestic Cayman rules. Draft legislation and regulations are expected in May 2014.

It remains to be seen how closely the Cayman domestic reporting regulations will mirror the FATCA equivalents. It is not yet clear whether the ITCs will allow for a “sponsoring entity” concept (as exists with FATCA) to enable FIs to delegate responsibility for compliance to the fund manager (which may act as the manager of multiple funds) or another service provider, although it is anticipated that such arrangements will be permissible.

FIs will already have incurred time and expense preparing for FATCA. As a consequence, most are likely to have systems and procedures in place to enable the identification and reporting of UK reportable accounts. However, FIs should take care to update and amend their FATCA systems and fund documentation to comply with the ITC.

FIs that are outsourcing FATCA compliance to an administrator or other service provider should contact such third party to discuss the impact of the ITC. Under FATCA, most foreign financial institutions are looking to their administrators to perform the due diligence, reporting and, where necessary, withholding obligations. We understand that most administrators are separately pricing and documenting FATCA services (often on a per account basis, with the contractual arrangement taking the form of a separate addendum to the administration agreement). These contracts may need to be further amended and revised fees negotiated in light of the ITCs. The addition of a new regime will place an increasing compliance burden on administrators.

FIs may wish to notify UK investors of the forthcoming reporting obligations (whether by including disclosure in fund documentation or otherwise). UK account holders who have not disclosed offshore accounts to HMRC may wish to pre-emptively make an unprompted disclosure to HMRC regarding any accounts, to avoid more stringent penalties.

Developing OECD Proposals

It is also worth noting that the OECD has been developing proposals to implement a common international reporting standard for the automatic exchange of financial account information, to be used by those jurisdictions wishing to automatically exchange financial information. There is significant international support for such standards. Although proposals are in the early stage of development, an OECD standard model will likely be introduced in due course. Any such model is likely to have a direct impact on FATCA and the ITCs, although the precise nature of interaction between any OECD standard and the existing regimes remains to be seen.

Footnotes

1. This marks another distinction between FATCA and the ITC – the ITC focuses only on the residency of entities and individuals, whereas FATCA focuses on US citizens (wherever resident) and US residents.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP
Contact
more
less

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!