As part of the Cayman Islands longstanding commitment to tax transparency and meeting international standards (most notably reflected in the fact that the Cayman Islands are on the G-20's 'white list' of compliant jurisdictions), the Tax Information Authority (International Tax Compliance) (United States of America) Regulations, 2014 (US Regulations) and the Tax Information Authority (International Tax Compliance) (United Kingdom) Regulations, 2014 (UK Regulations and together the Regulations), were gazetted and therefore brought into force in the Cayman Islands on 4 July 2014. The Regulations are part of a legislative framework recently established for the purpose of enabling the Cayman Islands to comply with its obligations under intergovernmental agreements entered into bilaterally between the Cayman Islands and the US on 29 November 2013 (US IGA), and the UK on 5 November 2013 (UK IGA and together the IGAs). The IGAs require the Cayman Islands to introduce legislation requiring certain financial institutions (FIs) to report US or UK tax resident accountholders to the Cayman Islands Tax Information Authority (TIA) which will then pass that information to the IRS or HMRC (who are each attempting to reduce tax evasion by their respective citizens). The enactment of the Regulations follows amendments to the Tax Information Authority Law (Law) made in 2013 to take account of the terms of the IGAs and more particularly to update the Law so as to enable the Cayman Islands to comply with its new automatic exchange of information obligations. Guidance notes to assist FIs to comply with the Regulations are to follow.
Broadly the FIs caught by the Regulations include:
- Custodial Institutions – any FI holding financial assets for the account of others.
- Depository Institutions – any FI accepting deposits in the ordinary course of banking or similar business.
- Investment Entities – most investment funds (other than certain regulated funds with restricted categories of investor and most pension funds), administrators and some advisors/managers.
- Specified Insurance Companies – insurers liable under certain cash value insurance and annuity contracts.
The Regulations simplify an FI's obligations in this sphere. The US Regulations facilitate reporting FIs to avoid having to register directly with the IRS and identify their US tax resident accountholders or face a 30% withholding tax on gross payments from US payors and may instead report directly to the TIA, provided that they register as a 'deemed compliant' with the IRS prior to 31 December 2014 and comply with the due diligence and reporting standards described in the US Regulations. The first reporting is due by 31 May 2015 (Regulation 8). The UK Regulations broadly provide for similar due diligence and reporting obligations with respect to UK tax residents as for US tax residents under the US Regulations although the criteria for identifying UK tax residents are narrower as the UK does not tax its non-resident citizens. Nor is there any risk of the imposition of a withholding tax for non-compliance. The first reporting is due by 31 May 2016 (Regulation 7(3)).
Regulation 15 and 11 of the US Regulations and UK Regulations (Inspection Provisions) respectively require that a FI provide to the TIA so that it might confirm that any reported information provided is 'correct and complete':
- within a time frame as specified by the TIA , 'the information, including copies of any relevant books, documents or other records, or any electronically stored information, that the…[TIA]… may reasonably require'; or
- to make available for the TIA's inspection at the time specified by it, 'all copies of books, documents or other records, or any electronically stored information, in the… [FFI's]...possession or under its control'.
Further, where any relevant information required to be produced to the TIA is located outside the Cayman Islands, the FFI is obligated to take all necessary steps to bring the information into the jurisdiction.
It is notable that the Inspection Provisions grant significant powers to the TIA to gather or inspect an FI's books and records (in order to subsequently comply with the automatic exchange of information provisions of the TIAs). The TIA was previously required to seek the directions of the Grand Court (MH Investments and JA Investments v Cayman Islands Tax Information Authority (unreported)) before any information could be then disclosed to foreign tax authorities.
Failure to comply with the Regulations is an offence punishable by a fine of up to a maximum CI$5,000 and/or imprisonment of up to two years.