As previously discussed, the US government will crack down on citizens keeping money offshore and not disclosing, just as the Aussie government did during our crisis in the 90's. Aivars Lode
The Cayman Islands, known as a haven for wealthy Americans seeking to stash cash overseas without scrutiny from the U.S. government, is about to become less secret.
An agreement between the countries will put in place the Foreign Account Tax Compliance Act, or Fatca. The 2010 law makes it tougher to hide money overseas because foreign banks must report their accounts to the U.S. Internal Revenue Service or face, in some cases, a 30 percent withholding tax.
“The Caymans have traditionally been thought of as a secrecy jurisdiction, as was Switzerland,” Dennis Brager, a former IRS senior trial attorney who now headsBrager Tax Law Group APCinLos Angeles, said in an interview Aug. 15, the day after the agreement was announced.The accord is significant because the Cayman Islands is a major financial center and home to operations for dozens of banks, funds and wealth-management entities, according to Bloomberg BNA. Among major banks that do business in the Cayman Islands are the Royal Bank of Canada, HSBC Holdings Plc (HSBA), Bank of Nova Scotia, Bank of AmericaCorp., Deutsche Bank AG, UBS AG, and CIBC FirstCaribbean International Bank.
“People come into my office in utter shock,” he said. “They thought their bank was too small or their country too remote or the information was too deep,” said Brager. “The truth is that your information is going to be turned over.”
Switzerland and the U.S. signed an intergovernmental agreement in February to comply with Fatca. Separately, the U.S. and Swiss governments are negotiating the terms of handing over data about former U.S. clients suspected of tax evasion.
The congressional Joint Committee on Taxation estimated in 2010 that the law would generate $8.7 billion in tax revenue over 10 years. Today, the IRS announced a new online Fatca registration system for overseas banks.
The agreement with the Caymans is another sign that U.S. taxpayers’ accounts are increasingly subject to government scrutiny on multiple fronts. Several other Caribbean jurisdictions with significant financial industries, such as Bermuda and the Bahamas, are among the dozens of countries having discussions about similar accords.
“They’re falling like dominoes,” Brager said.
So-called intergovernmental agreements, or IGAs, similar to the one announced last week allow banks to share the information with their own governments, which then pass the data on to the IRS.
In general, no withholding tax will be due on payments in an IGA country -- a feature that has made the accords attractive to jurisdictions around the world. Banks must still engage in due diligence and report the accounts.
Financial institutions have work to do to comply with the U.S. law. Still, the Caymans agreement, accompanied by a new and broader tax information accord, symbolizes the rapid increase of tax transparency, tax lawyers say.
“It is a milestone,” Manal Corwin, head of international corporate tax services at KPMG LLP, said in an Aug. 15 interview. “Step by step, you’re seeing this broadening to a global standard,” Corwin, until recently the Treasury’s deputy assistant secretary of tax policy for international tax affairs.
Denise Hintzke, global Fatca leader for Deloitte Tax LLP, agrees.
“We are moving toward more global information exchange,” she said in an Aug. 15 interview. The Caymans accord “is the first step toward being able to do that.”
What’s more, the Cayman Islands is entering into a “Model 1” Fatca agreement, she said.
“It means that they’re taking on the responsibility of Fatca guidance and regulations and they will take responsibility for enforcing the requirements of the law,” she said. “They are going to step into the role of getting information directly from their financial institutions.”
John Harrington, a former Treasury international tax counsel, said, “There is certainly a push toward broader information exchange and automatic exchange. This is reflective of that broader movement.”
The agreement was anticipated by tax lawyers because the Caymans’ government announced in June it would take action to fight tax evasion.
Jonathan Jackel, senior counsel at Burt, Staples & Maner LLP, said the surprise is how vocal the Cayman Islands government has been in supporting Fatca -- a stance that reflects the need for its financial services industry to stay competitive.
“Financial centers are a very important part of the Caymans’ economy,” Jackel said in an Aug. 16 interview. “The fund industry is a very significant part of the picture.”
One of the biggest difficulties under Fatca is rules that “grandfather” in certain entities for purposes of the withholding tax, Jackel said. With the removal of the withholding tax in most cases under an IGA, “that gets rid of a huge complication” and financial companies can focus on due diligence.
Robert Stack, U.S. Treasury deputy assistant secretary for international tax affairs, said in a statement that Treasury is “especially pleased” that the accord will provide certainty to the islands’ “significant fund industry.”
Harrington, currently a Washington-based partner in Dentons Tax practice, said the benefits of an IGA, including the general absence of withholding taxes, probably appealed to the Caymans government.
There is a tradeoff, he said, of “‘we’ll give you the information you want in exchange for the greater freedom of our institutions.’” The agreement is attractive to U.S. payors who may be confronted with withholding, he said.
“You want to know for sure what the treatment is going to be,” Harrington said.
Banks are still working to comply with Fatca.
“We are monitoring the overall impact of this legislation, particularly with respect to minimizing its impact on client service, privacy and costs,” Jason Graham, a spokesman for Royal Bank of Canada, said in an e-mailed statement.
CIBC ``will meet all Fatca obligations, in accordance with local laws,'' bank spokesman Kevin Dove said in a statement.
The Treasury Department announced last month that it was delaying Fatca’s implementation date by six months, until July 1, 2014, to give foreign banks more time to refine their systems and allow intergovernmental agreements to be signed.
“Financial institutions still have to engage in due diligence to identify U.S. accounts, and they still have to do the reporting,” to their own governments, Corwin said. “Everybody has to comply.”
Hintzke stressed that banks must register under Fatca and document and identify their account holders. Jackel, too, sees burdens for banks in dealing with clients or investors.
“There’s still a very big mountain to climb,” he said.