Cayman Islands Reach FATCA Agreement with the United States

The Cayman Islands Government has announced that negotiations with the United States have been successfully concluded on a reciprocal Model I Intergovernmental Agreement (IGA) and a new Tax Information Exchange Agreement (TIEA).

This now paves the way for an automatic exchange of information between the two countries under the US Foreign Account Tax Compliance Act (FATCA) which targets US taxpayers holding financial assets outside of the US who might be evading tax through offshore vehicles.

The FATCA model is likely to be adopted as a template for widespread Government managed multilateral information exchange arrangements with the US in the future.

The Cayman Islands agreement requires foreign financial institutions (FFIs) there to report accounting information direct to the Government which is then relayed to the US Internal Revenue Service (IRS). The US Government is currently in discussions with the UK’s HM Treasury to finalise terms over a Model I IGA FATCA with the UK.

FATCA currently affects US citizens, FFIs or any organisation in which a US taxpayer has a substantial interest, like an offshore company or trust.

The legislation imposes a withholding tax of up to 30% on certain payments to FFIs unless the FFI enters into a contract directly with the IRS. The current agreements contain obligations which can conflict with local laws in many jurisdictions which is why the US is looking to develop two model IGAs in conjunction with the UK as well as France, Germany, Italy and Spain.

The Model 1IGA involves a bilateral exchange of tax information with the US for jurisdictions that already have an income tax treaty or tax information exchange agreement with the US and have robust protections in place to keep the information that is exchanged confidential. A Model II IGA operates on a non-reciprocal basis where the US is not obliged to share information.