Out-Law / Your Daily Need-To-Know

Cayman Islands formalises FATCA-style tax information exchange agreement with UK

Out-Law News | 07 Nov 2013 | 9:38 am | 3 min. read

The Cayman Islands has become the first of the British Overseas Territories (BOTs) to formalise an agreement to automatically provide information about UK taxpayers that hold accounts in the territory.

Cayman's Premier, Alden McLaughlin, signed the inter-governmental agreement (IGA) (43-page / 577KB PDF) this week. The Cayman Islands has also formally agreed to be part of the G5 multi-lateral information sharing pilot, under which 31 jurisdictions including the UK, France, Germany, Italy and Spain will automatically exchange information about bank accounts held by taxpayers from their jurisdictions.

All of the BOTs committed to sign IGAs with the UK earlier this year, but the Cayman Islands is the first to formalise the agreement. The announcement follows the signing of similar agreements between the UK and the Crown Dependencies (CDs) of the Isle of Man, Jersey and Guernsey last month.

"We welcome this signing with the Cayman Islands, the first Overseas Territory to sign this type of agreement in the UK," said George Osborne, Chancellor of the Exchequer. "This demonstrates our shared commitment to tackling tax evasion."

"Alongside the significant investment that the Government has made in HMRC's anti-avoidance and evasion work, these agreements will help them to clamp down further on those individuals who seek to hide their assets offshore. Our message is very clear: it is only fair that people pay the tax they owe. If you are trying to evade tax, we are coming after you," he said.

The IGA between the UK and Cayman Islands is an example of 'UK FATCA', which is modelled on the agreement the UK is entering into with the US under its Foreign Account Tax Compliance Act (FATCA). FATCA is designed to prevent tax evasion by US citizens using offshore banking facilities, and introduces reporting requirements for foreign financial institutions (FFIs) with respect to accounts held by US residents. UK FATCA means FFIs in certain territories will have to provide information to their local tax authority about accounts held overseas by UK residents. This information will then be provided to HMRC under exchange of information agreements.

The Government announced in May that all BOTs and CDs with significant financial centres had committed to the introduction of information-sharing arrangements. The other participating overseas territories are Anguilla, Bermuda, the British Virgin Islands, Gibraltar, Montserrat and the Turks and Caicos Islands. Agreements with the BOTs will not be reciprocal, meaning that information will only flow from the BOT to the UK. The agreements with the CDs allow for a two-way exchange of information.

"The new reporting requirements are very broadly drawn and will require financial institutions in the Cayman Islands to automatically report information to HMRC regarding offshore investments in existence on or after 30 June 2014 which are held by UK resident individuals, partnerships and companies," said tax expert Reg Day of Pinsent Masons, the law firm behind Out-Law.com. "The rules will also apply to offshore trusts and companies to the extent that there are UK-resident settlors, beneficiaries or beneficial owners."

"The exchange of information in respect of the calendar years 2014 and 2015 must be completed by 30 September 2016, and it is anticipated that HMRC will receive a mountain of information which will inevitably lead to some criminal prosecutions and numerous civil investigations," he said.

HMRC has announced tax disclosure facilities for the CDs to encourage those with undisclosed tax liabilities to come forward and make voluntary disclosures, in a "relatively benign environment" and on beneficial terms, Day said. The department has estimated that it will collect an additional £1 billion through these facilities, which are available until 30 September 2016.

"Interestingly, no tax disclosure facility has been announced for the Cayman Islands although it is possible that HMRC may announce a BOT Tax Disclosure Facility when all the agreements with the BOTs have been concluded," he said. "However, the Liechtenstein Disclosure Facility is available until 5 April 2016 – it has arguably better terms, and is open to anyone who will be affected by the exchange of information," he said.

Cayman's Premier, Alden McLaughlin said that steps to establish the legislative and operational framework to implement the new agreement were underway. In addition, the government would issue guidance to assist with its implementation, he said.

The IGA was welcomed by Cayman Finance, an industry body representing Cayman's financial services industry. Gonzalo Jalles, the body's chief executive, said that the agreement "reinforces our reputation as a well-regulated and transparent international financial centre".