A U.S. government official commented on the agreement: “By working together to detect, deter and deter offshore tax abuses by increasing transparency and improving reporting, we can contribute to a stronger, more stable and accountable global financial system.” The United States is not the only country with which the Cayman Islands share financial information. Shortly before the signing of the FATCA agreement of the United States, the Cayman Islands signed a FATCA agreement with the United Kingdom. Model 1 IGA (published on 26 July 2012 and amended on 14 November 2012) provides that FFI headquartered in the IGA partner country identify US accounts in accordance with the duty of care imposed by the partner country and provide certain information to the relevant government authorities of the partner country. The information is then automatically exchanged by the partner country with the IRS to provide the same quality and quantity of information that the IRS would receive from a participating FFI under a bilateral agreement. As noted in our previous updates to the Foreign Account Tax Compliance Act (“FATCA”), the Cayman Islands government and the U.S. Treasury officially signed the FATCA Model 1 (“IGA”) non-reciprocal intergovernmental agreement on November 29, 2013. The two governments also signed an updated agreement on the exchange of tax information, which will replace the agreement signed in 2001. The signing of the Model 1 IGA with the United States follows the recent signing of an equivalent agreement with the United Kingdom on 5 November 2013. The Foreign Account Tax Compliance Act (“US FATCA”) was passed in 2010 in the United States to reduce offshore tax evasion by U.S. individuals holding assets through offshore accounts that are not subject to notification of U.S. information to the Internal Revenue Service (IRS). The U.S.
FATCA requires a foreign company that is a foreign financial institution (“financial institution” or “FI”) to either enter into an agreement with the IRS for such a report, or (ii) to comply with local laws that implement an intergovernmental agreement (IGA). If a financial institution does not comply with the U.S. FATCA, a 30% withholding tax is deducted from that financial institution`s income from the United States. Financial institutions are also required to close accounts on which their U.S. clients do not provide the information they collect. Tax cooperation between the United States and the Cayman Islands began in 2014, when the agreement on the automatic exchange of tax information came into force between the Cayman Islands and the United States, in accordance with the U.S. Account Compliance Act (FATCA). FATCA is a U.S. legislative law that aims to prevent U.S.
citizens living abroad from committing tax evasion. Following the issuance of the FATCA regulations, the U.S. Treasury, in collaboration with several foreign governments, developed two alternative IGA models. IGas allow foreign governments to implement FATCA in a way that removes some of the legal barriers to respecting rights abroad (for example. B privacy laws) and reduces the compliance burden of FFIs. Both IGA models require FFIs that are located in the relevant non-U.S. jurisdiction to identify and report information about U.S. accounts. The information exchange agreement requires Cayman`s financial institutions to provide direct information to the Cayman Islands government regarding bank accounts and non-financial organizations held by U.S. citizens.
The information provided is forwarded to the U.S. Internal Revenue Service (IRS). The IGA mechanism offers considerable advantages to Cayman FFI over a system of direct notification of the IRS under a bilateral agreement: fatca requires U.S. withholding agents: 30% of payments from qualified U.S. sources, including U.S. source interest and dividends paid by these withholding agents to an FFI, unless the FFI has entered into an agreement with the IRS , directly or indirectly, through the mechanism of an intergovernmental agreement (IGA).