What can you do with three tiny islands in the Caribbean Sea, covering a total of just 102 square miles (264sq.km.); a population which would fit into the 60,000-seater Emirates Stadium in London with room to spare; and where the only tourist attractions are swimming and scuba diving among stingrays? The answer, of course, has been to create one of the world’s leading financial centres.
With nearly 300 banks, the vast majority of which conduct international banking only, the Cayman Islands has long been regarded as an attractive place to keep your savings. No tax to worry about and a financial regime described by the IMF as having a “very strong” compliance culture. Until now, the biggest worry on the Cayman Islands has been the strength of the hurricanes which affect the region every year.
But if you are the holder of a US passport, the Cayman Islands are soon to lose some of their financial appeal. The Cayman Islands pride themselves on being tax transparent. Laws which have been passed recently give the authorities powers to collect tax information and share it with other jurisdictions. And the Islands’ authorities have indicated that they intend to cooperate with the United States’ Foreign Account Tax Compliance Act (FATCA).
FATCA has three main provisions. Firstly, it requires foreign financial institutions, such as banks, to enter into an agreement with the US Internal Revenue service (IRS) to identify their US account holders and to disclose the account holders’ names, addresses, and the balances, receipts and withdrawals from the accounts. Secondly, US citizens who own foreign accounts or other financial assets must report them to the IRS. Thirdly, it closes a tax loophole that foreign investors had used to avoid paying taxes on US dividends by converting them into “dividend equivalents” through the use of swap contracts.
This is unlikely to lead to a mass withdrawal of funds from the Cayman Islands by US citizens. As the provisions of FATCA show, it is aimed at individuals as well as institutions and jurisdictions, so wherever an American puts his or her money they are obliged by the Act to declare it. And the regulatory regime in the Cayman Islands remains attractive. The Islands have no capital gains or income tax, a well-developed body of trust law and reliable secrecy laws for non-tax purposes.
So the onus remains on the individual to comply with the law. The IRS is currently offering a foreign account amnesty programme. This does not, however, mean that a US citizen can simply do nothing. It means that they still have time to fill out a Report of Foreign Bank and Financial Accounts (FBAR). An FBAR must be filed if, as the IRS puts it, “You hold in foreign banks and other financial institutions $10,000 or greater at any time during the year.”
It has been estimated that the US Treasury loses as much as $100 billion annually to offshore tax non-compliance. So if you are a US citizen and you have an unreported bank, brokerage, hedge fund or even insurance policy with a cash or investment component in the Cayman Islands, you may wish to think about acting now. Then, with a clear conscience you can enjoy the scuba-diving. Just watch out for the stingrays. You don’t want to be stung under the water, too.