Recognition for Cooperation: A Taxing Process

2013年 11月 8日

This article first appeared in the IFC Caribbean 2014 review.

More so than most other international financial centres, the Cayman Islands has been the pick of opposition by the heavyweight onshore contenders, especially when it comes to deflecting blame for the banking and credit crisis. Some critics compare the Cayman Islands to more of a journeyman; someone called in to go a few rounds for political gain, whether international or domestic. It's no coincidence that Cayman tends to get most of the bouts on their card around the time of foreign elections. 

Historically, ring-side commentators would discuss the potential exposure of the Cayman Islands to money laundering, shadow banking and foreign tax evasion. In the ring, the Cayman Islands would be dealt blows with the release of reports, founded largely on beliefs and stereotypes held by the Tax Justice Network, certain NGOs and certain sections of the media. Although reacting and responding to each of these reports was very taxing, that is precisely what Cayman has done since 2000. 

Around the time of the OECD Harmful Tax Regime exercise, a collective decision was made between the public and private sectors in the Cayman Islands that, if the jurisdiction was to continue to prove itself as a legitimate platform for international financial business, it would need to "glove-up" for each reproach. 

In certain circumstances, that may have meant producing evidence to dispel myths, or to educate the misinformed. In other cases, it meant adjusting policy to meet the ever-changing global principles. It's that latter category of adaptation that has been the main proponent of Cayman's survival and success in the modern global financial markets. 

Regulatory Cooperation 

The Cayman Islands Government has taken many proactive steps to enhance its cooperation with international regulators and authorities to adopt "best practice" international standards and to strengthen its regulatory structure against money laundering, terrorism, crime and tax fraud. The government has cooperated with the OECD, the FATF, the IMF and, through bilateral information exchange agreements, with the governments of many onshore G20 jurisdictions (including the US and the UK). 

The Cayman Islands Monetary Authority ("CIMA"), the financial services regulator, is a full member of the International Organization of Securities Commissions ("IOSCO"); the Offshore Group of Banking Supervisors; the Offshore Group of Insurance Supervisors ("OGIS") and the Offshore Group of Collective Investment Scheme Supervisors. CIMA has executed numerous Memoranda of Understanding and Undertakings with equivalent regulatory agencies in foreign jurisdictions, including the US Treasury, the US Federal Reserve, the US Securities and Exchange Commission and the Commodity Futures Trading Commission. 

CIMA is a signatory to the IOSCO Multilateral Memorandum of Understanding concerning Consultation and Cooperation and the Exchange of Information, and has more recently entered into regulatory cooperation and information exchange agreements with 25 of the European Union regulators pursuant to the Alternative Investment Fund Managers Directive. 

Aside from the separate Memoranda of Understanding, CIMA is empowered under the Monetary Authority Law to entertain requests for information from recognised overseas regulatory authorities, which would result in a Cayman Islands entity being directed to produce the information to CIMA for onward disclosure to the overseas regulatory authority. This regulatory request mechanism has been used regularly and efficiently over the past 10 years by many overseas regulatory authorities. 

History of OECD Interaction and Exchange of Tax Information 

Over the last three years, the Cayman Islands has faced, and fared well against, two of the most significant international initiatives relating to cooperation and information exchange; the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Review Process ("Global Forum") and the more recent G5 Multilateral Automatic Exchange of Information Pilot ("G5 Pilot"). The principles underlying the G5 Pilot have been heavily influenced by the US Foreign Account Tax Compliance Act ("FATCA").

In relation to disclosure for tax matters, the Cayman Islands made a commitment to the OECD in 2000 to adhere to their principles on exchange of tax information and transparency.  The Cayman Islands signed a Tax Information Exchange Agreement ("TIEA") with the United States in 2001 and multiple requests for information have been made and responded to under this regime. 

The US TIEA and subsequent TIEAs entered between Cayman and other foreign jurisdictions conform to the model developed with the participation of the United States and the OECD Global Forum on Taxation. Further, TIEAs have since been agreed by the Cayman Islands with 30 countries. 

The Cayman Islands Government has implemented the EU Savings Directive with equivalent legislation, which (through bi-lateral treaties with all EU states) provides for automatic information-sharing on interest income paid to EU citizens from Cayman accounts. 

In 2005, the Tax Information Authority Law was introduced, which established the Tax Information Authority (the "Cayman TIA") as the competent authority in the Cayman Islands for dealing with foreign tax information requests and tax reporting under bilateral arrangements and the EU Savings Directive equivalent legislation. 

Since 2009, the Cayman Islands has also been a member of the OECD's Global Forum Steering Group and Peer Review Group. 

The OECD Peer Review Process 

The Cayman Islands was one of the first of eight countries to be assessed under the OECD Global Forum's Peer Review Evaluation Programme that was launched in 2010. The Evaluation Programme was split into two phases; the first focused on the quality of member jurisdictions' legal and regulatory framework for the exchange of information for tax purposes; the second evaluated the practical implementation of the member jurisdictions' tax information exchange regime; i.e. whether the regime works in practice. 

In September 2010, the OECD Global Forum recognised the Cayman Islands in their Phase 1 Report as a "well-developed legal and regulatory framework" that promotes access to information by ensuring its legal authorities are "invested with broad powers to gather relevant information". 

In April 2013, the OECD Global Forum released their Phase 2 Peer Review Report on the Cayman Islands. The Phase 2 Review, which was undertaken between July 2012 and January 2013, confirmed: 

(a)  The Cayman Islands has addressed all recommendations in the Phase 1 Report; 

(b)  The Cayman Islands has succeeded in practically implementing the international standard for transparency and exchange of information; 

(c)  The Cayman TIA is well organised with adequate internal processes in place for handling exchange of information requests, and has successfully exercised its powers in gathering information for requesting authorities; and

(d)  Requesting authorities have attested to the high quality of responses provided by the Cayman Islands in a swift and timely manner. 

The next step in the Global Forum Peer Review process will be the preparation of Phase 2 jurisdictional ratings, which are expected to be discussed and assigned at the Peer Review Group meeting in Paris this month. The Cayman Islands will continue its participation in global tax and transparency initiatives, including high-level involvement on both the Steering and Peer Review groups of the Global Forum.  


The reader should, by now, be well versed in what FATCA is, and what it intends to achieve. 

For years, onshore governments have been trying to identify a way to place pressure on foreign institutions, outside the jurisdiction of the onshore authorities, to pro-actively report the identity and financial status of onshore tax residents with foreign assets. Historically, this was undertaken by way of ad hoc requests to foreign tax (or tax information) authorities, for information within their jurisdiction that may pertain to a tax investigation of the onshore tax resident. 

One of the key problems with this approach was the fact that the requesting authority would need to have ascertained some basic details of the tax resident's identity and location of foreign assets before making the request. Tax investigations would often be stymied as even the most fundamental information may have been unavailable due to complex structuring of asset holding vehicles and jurisdictional constraints. 

In a manner similar to the approach taken by the EU, under the EU Savings Directive, the US Government settled on an automatic tax information exchange mechanism, compliance with which would be driven by the threat of a 30% withholding tax levied on any income or (ultimately) gross proceeds sourced from the US. In essence, the obligation would be on the US paying agents to withhold the 30% where they were not assured that the payee had complied with the registration and/or reporting requirements under FATCA (or were alternatively carved out).  

In response to foreign government concerns about the potential impact arising from lack of jurisdiction and duties of confidentiality, the US Treasury agreed to enter separate bi-lateral agreements with jurisdictions willing to adopt the equivalent FATCA principles under local applicable law. The US developed two versions of a Model Intergovernmental Agreement ("IGA"), which scores of jurisdictions are now queuing up to enter. Witnessing the success of this strategy, the UK jumped on the opportunity to impose similar obligations on the Crown Dependencies and Overseas Territories. 

Given the strength of its investment fund and captive insurance markets, the Cayman Islands was quick to realise that signing up to an IGA was in the best interests of its clients. Accordingly, the Cayman Islands Government concluded negotiations with the US Treasury on a Model 1 IGA in mid-August 2013. The IGA is currently before both governments for final approval before coming into legal effect, which is anticipated before the end of the year. In order to meet pending timelines under FATCA, it is likely that the Cayman Islands Government will add the IGA as a schedule, and make the necessary amendments, to the existing TIA Law to expedite the enabling of the provisions. 

G5 Pilot and OECD Multilateral Convention 

Recognising the shift to the new global standard of automatic exchange through FATCA,  the Cayman Islands Government , requested to participate in the G5 pilot on multilateral automatic exchange of information (the "Pilot") in April 2013. Essentially, the G5 have agreed to the automatic exchange of financial information among themselves, with a view to expanding multilateral automatic tax information exchange protocols to other European countries, including the G8. 

The G5 are going to base the Pilot on the IGA previously developed between the US and the G5 under FATCA. The protocols and terms will ultimately be regarded as the global standard for automatic tax information exchange. 

Separately, in June 2013, the Cayman Islands Government also committed to the OECD Convention on Mutual Administrative Assistance in Tax Matters (the "Convention"). The Convention is a multilateral instrument, which currently has over 50 signatories, designed to combat tax evasion and aggressive tax avoidance by allowing member states to assist each other in tax matters, including the exchange of information for tax purposes through to the service of documents. 

Although there are certain elements of the Convention that can be waived by signatories, the key principles must be adhered to. We understand that the Cayman Islands Government has noted that it will not handle matters related to requests for the recovery of foreign tax claims, or exchange information regarding local taxes and social security contributions. As a tax neutral jurisdiction, the Cayman Islands similarly would not be expected to apply the obligations relating to spontaneous tax information reporting, as it would have no knowledge of the scope of foreign tax regimes and no experience of oversight.  

In early September 2013, the Cayman Islands Government formally asked the United Kingdom to extend its membership in the Convention to the Cayman Islands. 


Certain cynics have alluded to the advent of automatic tax information exchange as "the beginning of the end" for certain international financial centres. Such a prognosis can only be based on the flawed assumption that the type of business conducted in that financial centre is such that the secrecy of the business is paramount. 

Unfortunately, that is just simply not the case for most of the international financial centres, including the Cayman Islands. The fact is that the Cayman Islands is used by multi-national financial institutions, conglomerates, governments and alike, for multiple other commercial reasons, and the risk of disclosing underlying beneficial ownership information by law is not of great consequence. 

Accordingly, the Cayman Islands has decided to position itself at the forefront of these initiatives in order to engage with the relevant governments and authorities and provide some influence in the practical application of the principles  in the global markets. In other words, the Cayman Islands will continue to front up to a prize fight when called. 

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