On 16 June 2015 the Department of International Tax Cooperation (the "DITC") of the Cayman Islands government announced that it was moving forward with the implementation of the OECD Common Reporting Standard ("CRS"), via the introduction of Cayman Islands domestic law, by October 2015.
The CRS represents a significant step towards the global automatic exchange of information ("AEOI") for tax purposes and there are currently more than 90 countries that have committed to its implementation.
The United States of America has not yet agreed to adopt the CRS, instead continuing to rely on the extensive reach of FATCA and its related network of intergovernmental agreements to achieve the AEOI on tax matters.
The Cayman Islands is one of the first countries (referred to as the "Early Adopter Group") that has agreed to implement AEOI exchanges under CRS by September 2017.
How does the CRS work in the Cayman Islands?
The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the "Convention") to which the Cayman Islands is a party, permits participating countries to enter into agreements that, inter alia, provide for the automatic exchange of information with respect to tax matters. Through operation of the Convention the Cayman Islands, along with more than 60 other countries, has signed a Multilateral Competent Authority Agreement (the "MCAA").
The MCAA is the legal basis through which the participating countries can agree, as between themselves, to a common reporting standard with respect to information reporting, due diligence and the exchange of information on financial account information. In order to implement what the participating countries have agreed to within the MCAA and the CRS, it is necessary for each country to introduce its own piece of domestic law, which the Cayman Islands has announced it intends to do by October 2015.
The MCAA is only several pages in length but it links to the CRS and is the legal basis for the exchange of financial account information between participating countries. Sections 2 and 3 of the MCAA cover the type of information to be exchanged and the time and manner of the exchange. Section 5 then contains the confidentiality and data safeguards that must be respected.
The CRS contains the account due diligence and reporting standards to which each participating country has agreed. The OECD's intention behind implementing a common standard of reporting was process simplification, higher effectiveness and lower costs for all stakeholders concerned. Without adopting a common standard of reporting, the OECD had concerns that there may be a fragmentation of standards (resulting in increased costs of compliance) and tax evasion arbitrage.
To assist with its interpretation, the OECD has published detailed commentary on the MCAA and the CRS. It is also expected that further guidance may be published in addition to domestic legislation in the Cayman Islands.
The overall process for identifying reportable entities and reportable customers under the CRS is similar to the FATCA Model 1 IGA, but there are some key differences, including that the CRS is based on tax residency rather than citizenship. The type of reporting financial institutions that will fall within the scope of CRS include custodial institutions, depository institutions, investment entities and specified insurance companies, unless they represent a low risk of being used for evading tax and are specifically excluded from reporting. There was a similar, but much more extensive, process of exclusion under Annex II to the Model 1 IGA. It is likely that a greater number of financial institutions will be reporting entities under CRS than the Model 1 IGA because of the narrower exclusions. This will be covered in further detail in a subsequent legal update, once the implementing legislation is finalised.
'Reportable Accounts' include accounts that are held by individuals or entities (including trusts) tax resident in the respective jurisdictions, and there is a requirement to look through passive non-financial entities to report on their ultimate controlling persons.
What are the key dates for CRS in the Cayman Islands?
In addition to advising that implementing domestic law should be in place by October 2015, the Ministry announced on 16 June 2015 the following key dates with respect to CRS in the Cayman Islands:
Pre-existing accounts are those that are open on 31 December 2015, with new accounts being those opened on or after 1 January 2016.
Due diligence procedures for identifying high-value pre-existing individual accounts shall be completed by 31 December 2016.
Due diligence procedures for identifying lower-value pre-existing individual accounts and for entity accounts shall be completed by 31 December 2017.
The first reporting to the DITC is anticipated to be required by 31 May 2017.
Further updates on CRS will be published as the domestic legislative process evolves over the remainder of the year.