The Cayman Islands' commitment to international transparency standards has been reinforced by its adoption of the amended Common Reporting Standards (CRS) regulations in December 2016, to ensure effective implementation of the Organisation for Economic Cooperation and Development (OECD) CRS in the Cayman Islands.
The Tax Information Authority (International Tax Compliance) (Common Reporting Standard) (Amendment) Regulations 2016 amend the original 2015 CRS regulations through which the Cayman Islands became one of the early adopters of the OECD CRS.(1) The year 2016 was the first reporting year under CRS for Cayman financial institutions, with certain information due to be submitted to the Department of International Tax Cooperation (DITC) on or before May 31 2017, for accounts opened since January 1 2016.(2)
The regulations represent the next step in the Cayman Islands' implementation of the CRS and are expected to allow the Cayman Islands to satisfy its "effective implementation" obligations of reporting and compliance procedures under the CRS. Effective implementation of the CRS is also one of the criteria that the European Union recently confirmed it will require for a jurisdiction to be considered compliant on tax transparency under its screening process of non-EU jurisdictions for its proposed list of non-cooperative jurisdictions for tax purposes. The Cayman Islands is now well placed to confirm its effective implementation of the CRS if it is screened as part of the European Union's process in early 2017. The DITC has stated that it will issue updated CRS guidance notes in the first quarter of 2017 to cover the regulations.
Registration All Cayman financial institutions (as defined in the regulations), whether they are classified as 'reporting' or 'non-reporting' and regardless of whether they have any reportable accounts, will have to register with the DITC on the Cayman Automatic Exchange of Information online portal and provide certain information by April 30 2017, including contact details for an individual designated as the principal point of contact for the CRS. This is a broader requirement than under the Cayman regulations which implemented the US Foreign Account Tax Compliance Act, and is intended to provide the DITC with details of all Cayman financial institutions. The effect of this change is relatively limited because at present there is only one limited class of non-reporting financial institution. Investment managers and general partners of funds which were classified as non-reporting financial institutions under the Foreign Account Tax Compliance Act and UK Crown Dependencies and Overseas Territories International Tax Compliance Regulations(3) were classified as reporting financial institutions for CRS purposes.
Nil returns Reporting financial institutions must file nil returns for all reportable jurisdictions for which they have no reportable accounts. At present, if a reporting financial institution has no reportable accounts in a reportable jurisdiction it does not have to file a nil return. It is advisable to file nil returns for the US Foreign Account Tax Compliance Act, UK Crown Dependencies and Overseas Territories International Tax Compliance Regulations and the CRS in any event.
Clear requirement for written policies and procedures Reporting financial institutions must establish, implement and comply with written policies and procedures to cover all of their obligations under the regulations. The Tax Information Authority has stated that when it takes any compliance or enforcement action, it expects a reporting financial institution to produce these written policies and procedures. For investment funds which have delegated this role to third-party service providers, this will mean ensuring that the service provider has written policies and procedures which could be produced.
New offences and penalties The regulations introduce various offences, including providing materially inaccurate information, tampering with information and hindering the Tax Information Authority in its functions, with fines and penalties for breach of up to $60,975. The offences include potential criminal liability for directors and certain officers where their financial institution commited an offence, unless they exercised reasonable diligence to prevent the breach. Any defendant has a defence if they have a reasonable excuse – however, insufficient funds and reliance on an agent are not classed as reasonable excuses. There will also be a deemed breach of policies and procedures if a reporting financial institution relies on a self-certification or documentary evidence which it knows or has reason to believe is materially inaccurate. In addition, it is now an offence for any person to provide a false self-certification to a Cayman financial institution. It is therefore important for a Cayman financial institution and anyone who has been engaged to assist with the CRS due diligence process to be aware that if they receive a false self-certification and are aware of that fact, it may be required to make a suspicious activity report under the Proceeds of Crime Law.
Due diligence – the 'wider approach' The DITC has given a timely reminder about the 'wider approach' that the Cayman Islands is taking to the CRS. Under the CRS, there is still a distinction between a 'participating jurisdiction' (which has indicated that it will sign up to and implement the CRS) and a 'reportable jurisdiction' (for which reporting will be required). Reporting financial institutions should ensure that they identify the tax status of all account holders and relevant controlling persons (in the context of investment funds, this means investors) and not just those that are in reportable jurisdictions. The DITC recognises that the timing of confirmation of reportable jurisdictions is an issue, but given the 'wider approach' it is recommended that all reporting financial institutions should be ready to make returns on all of the currently listed participating jurisdictions.
Due diligence – US professionally managed investment entities The funds industry in the Cayman Islands has been lobbying the DITC for some time for clarity as to how to identify and report controlling persons for professionally managed US investment entities. Given that a large number of investors in Cayman funds are US tax-exempt entities which include these types of investor, this is a key contentious issue and the DITC has said that it will give clarification of a possible relaxation of due diligence requirements for these types of entity. This will hopefully come before the May 2017 reporting deadline.
All Cayman financial institutions must review their existing CRS compliance policies and update them to ensure that they:
- have suitable policies and procedures in place;
- are correctly registered with the DITC; and
- are able to file any nil returns needed in May 2017.
Cayman incorporated investment managers and general partners of certain limited partnerships in particular may previously have been able to rely on an exemption from registration on the DITC's online portal for Foreign Account Tax Compliance Act compliance purposes, but will now need to register to comply with their CRS obligations.
The Cayman government has also published proposed changes to the Companies Law and the Limited Liability Companies Law to bring in beneficial ownership registers for Cayman companies, subject to certain exemptions for some regulated entities. If adopted in the existing form, the registers would not be open to the public but would be searchable by competent authorities in Cayman via a platform. Amendments were also introduced recently to the Monetary Authority Law, giving the Cayman Islands Monetary Authority new powers to issue administrative fines for breaches of certain regulatory laws.(4)
These regulatory changes and proposals show the Cayman Islands' continued commitment to implementing international transparency standards as well as its willingness to cooperate with international bodies to maintain its position as a leading international financial centre.
(2) As previously noted in "Preparing for the CRS" and "Cayman Islands Financial Account Reporting for Investment Funds".
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