By Karen Gilbert, senior associate and Christina Kish, associate.
In the recent ‘Open for Growth’ meeting held on 15 June 2013 with the UK Prime Minister, just prior to the G8 Summit on 17-18 June 2013, a number of offshore jurisdictions, including the Cayman Islands and the BVI, agreed to a continued commitment and effort to improve and ensure international tax compliance.
The Cayman Islands’ Premier confirmed that Cayman will continue to support the development of fair global standards as evidenced by its opting for a Model 1 IGA with the US on 15 March 2013, its decision to join the G5 Pilot for Multilateral Automatic Exchange of Information on 25 April and its joining of the Convention on Mutual Administrative Assistance in Tax Matters on 7 June 2013. He further confirmed that Cayman will be publishing national action plans on beneficial ownership at the same time as the other G8 countries who have agreed to do the same.
In turn, the BVI Premier has reiterated his support for the UK government’s global agenda on tax, transparency and trade. In addition, he also confirmed the BVI’s commitment to: (1) play an active part in the new pilot initiative of multilateral automatic tax information exchange launched by the UK, France, Germany, Italy and Spain; (2) prepare national action plans on Beneficial Ownership to meet the Financial Action Task Force standards; and (3) joining the Multilateral Convention on Mutual Administrative Assistance on Tax Matters.
The governments of both the Cayman Islands and the BVI are currently in negotiations with the United States to conclude Model I Intergovernmental Agreements (“IGA”) in relation to the US Foreign Account Tax Compliance Act, which becomes effective on 1 January 2014 (“FATCA”).
FATCA seeks to target tax evasion by US persons and is likely to have a significant impact on “foreign financial institutions,” which definition captures many Cayman Islands’ and BVI hedge funds, private equity funds and structured finance and securitisation vehicles which have interests in US based investments. FATCA requires FFIs to report to the IRS with respect to the interests of US taxpayers or apply a 30% withholding tax to transactions involving US taxpayers.
Entry into the IGAs will simplify and streamline FATCA compliance for such Cayman and BVI entities, most notably in the fact that a large number of these entities will not need to sign individual agreements with the IRS during 2013.
IGAs are intended to establish a mechanism for the automatic exchange of information obtained from financial institutions to the appropriate tax reporting authority and then (in this instance) onto the IRS in order to gain exemption or reduced obligations for FATCA reporting. Entry into IGAs with the US would clearly be very good news for these Cayman Islands and BVI entities and the negotiations demonstrate the commitment of both jurisdictions to compliance and transparency. It is hoped that further IGAs will be entered into with other relevant nations and discussions are already underway to enter into similar automatic information exchange arrangements with the United Kingdom.
In addition to these recent developments, both the BVI and Cayman Islands have implemented the European Union Savings Tax Directive and have also entered into a significant number (24 and 31 respectively) of information exchange agreements.