The US Department of the Treasury recently announced that the United States has signed a “Model 1” intergovernmental agreement (an “IGA”) with respect to the US Foreign Account Tax Compliance Act (“FATCA”) with the Cayman Islands. Like the other IGAs the United States has signed, the Cayman Islands IGA is intended to streamline FATCA information reporting and reduce compliance burdens for financial institutions in the Cayman Islands.

Background -

FATCA (contained in Sections 1471 through 1474 of the Internal Revenue Code) was enacted in 2010 in order to reduce perceived offshore tax evasion by US persons holding assets through offshore accounts that were not subject to US information reporting to the Internal Revenue Service (the “IRS”). FATCA generally requires a foreign payee that is a foreign financial institution (an “FFI”) either (1) to enter into an agreement with the IRS relating to such reporting (an “FFI Agreement”, and such an FFI, a “Participating FFI”) or (2) to comply with local laws that implement an IGA. If an FFI does not satisfy these requirements (and is not otherwise exempt), withholdable payments made to such FFI will be subject to withholding under FATCA at a rate of 30%. FATCA information reporting and withholding requirements generally do not apply to FFIs that are treated as “deemed-compliant” because they present a relatively low risk of being used for tax evasion or are otherwise exempt from FATCA withholding.