The IRS, FATCA and Caribbean IGA’s

Posted February 10, 2013

As the Caribbean comes to terms with the implications of FATCA, some territory governments are considering signing Intergovernmental Agreements (IGAs) with the United States. By way of background, the Foreign Account Tax Compliance Act (FATCA) is part of the effort by the US government to prevent money laundering, and reduce tax evasion. It has implications for (1) Americans residing outside of the US, (2) for financial institutions outside of the US (FFIs) with American clients and for (3) non-American businesses with American clients. In this commentary, I am only focusing on number (2).

Under FATCA, Foreign Financial Institutions (FFIs) can either report on the activity of American account holders directly to the IRS or to their own government who will in turn collate and pass on the data to the IRS. In principle, the real advantage of the IGA is with territories where Data Protection legislation prevents FFIs from remitting data directly to the IRS. Furthermore, the IGA route can reduce the complexity and the cost faced by FFIs in remitting data to the IRS. Otherwise, it may be just as easy for FFIs to remit data directly to the IRS. Failure to comply means that FFIs face up to 30% withholding fines on their US source income, so either way, FFIs are very motivated to comply.

In the Caribbean, the Bahamas, Jamaica, the Cayman Islands and Barbados are the only territories who appear to be seriously considering IGAs. In the Bahamas, last November the Government said that it was awaiting the release of the second IGA model before deciding. Interestingly enough, a former Attorney General has made the point that because the Bahamas does not have income tax, no independent tax authority exists. So the government may not have the infrastructure to capture and collate data from FFIs in its territory.

Another territory with no Income Tax is the Cayman Islands. Their approach appears to be different from the Bahamas though. Earlier this month, the Cayman Islands Directors Association (CIDA) voted in favor of IGA Model 1 which means that they actually favor reporting data to their government who will in turn pass it onto the IRS. It makes sense because that would make it harder for clients to discriminate in favour of FFIs who do not report to the IRS.

In Jamaica, a senior manager with Ernst & Young quoted a price tag of US$30 million for each of the 614 soon to be affected financial institutions to implement the requirements of FATCA. Naturally, the bankers have appealed to the Government to push for an IGA which as noted before, has the potential to reduce compliance costs. Jamaican Finance Minister Dr. Peter Phillips has said that talks with the US Treasury Department are taking place but he would not say whether the government would be looking to take on the responsibility of providing the information to the IRS via an IGA.

Last month, the Central Bank of Barbados confirmed that the territory has established a Working Group to negotiate an IGA within the next six months. Other territories should note that the Central Bank is engaged with the island’s promotional agency Invest Barbados, to develop a response to the US regulation, with input from the local financial services industry, and on the basis of discussions with other Caribbean nations’ policymakers. The Central Bank has also acknowledged that the January 1, 2014 deadline is critical and that “that the growth and continuation of its vibrant international business sector depends on its compliance with this US initiative.” As far as I am aware, Barbados is the only Caribbean territory taking such a strategic and consultative approach to FATCA and have established “…a working group under the joint leadership of Invest Barbados and the Central Bank of Barbados and comprising representatives from the Ministry of International Business, the Inland Revenue Department, the Barbados International Business Association, the Institute of Chartered Accountants of Barbados and the Barbados Bankers Association, has been established to keep abreast of the FATCA developments and to make recommendations to the Government of Barbados on its response”.

The silence in Trinidad and Tobago is curious given the vibrancy and reach of their financial sector. Perhaps this is due to the financial sector being dominated by Canadian institutions who are already FATCA compliant. So the burden of responsibility for lobbying the government rests with the Unit Trust, the various Credit Unions and local Insurance companies.

One feature of the IGA that is receiving much criticism is the idea of reciprocity. In theory, for those Caribbean territories that do sign IGAs, the US government is supposed to return the favour by remitting data on Caribbean nationals (as non resident aliens) with US financial assets. There is cynicism in some quarters however, that true reciprocity is unlikely. No legislative framework is in place in the US and Congress (and the US Banking sector) is opposed to it (the domestic version is commonly referred to as DATCA). Those who have read the US / UK IGA, point to how one sided it appears to be and hold it up as an example.

Only four bilateral pacts are fully completed, with the United Kingdom, Denmark, Ireland and Mexico. U.S. Treasury officials are still negotiating with more than 50 other countries. Critics go on to say that no one practices Citizenship taxation like the US asserts its right to do, so notions of reciprocity are totally unbalanced in and of itself. Obviously the Caribbean has little bargaining power with the US but other countries – such as France, Germany and China are said to be aggressively negotiating and insisting on true reciprocity. The president’s next budget plan is expected within weeks so we will see whether DATCA is mentioned.