Cayman Islands and the Foreign Account Tax Compliance Act

The United States and the Cayman Islands have reached an agreement to begin implementation of the Foreign Account Tax Compliance Act (FATCA). The purpose of FATCA, enacted by the United States in  2010 taking effect in 2014, is to combat offshore tax evasion.  Now that the Cayman Islands have signed on, their foreign financial institutions are required to report to the I.R.S. U.S. Citizens and green-card holders who hold offshore accounts and assets worth more than $50,000.   As we have previously discussed, once reported to the I.R.S., the I.R.S. can then cross-check the information with the individual (or entities) income tax returns and other required reporting documents, including, but not limited to FBARS, 5471s, 3520s, etc.  Failure to file these reports carry very serious monetary fines and other penalties.

The U.S. Treasury Department has criticized the Caymans for being a tax haven. The small island nation has no income tax and has been a popular place for investment funds and shell companies to form.  As FATCA builds in momentum other countries, like Luxembourg, Bermuda and the British Virgin Islands, will face increased pressure to negotiate deals with the United States to stay competitive with the Caymans for investment fund business. Countries who do not agree to comply with FATCA may be shut out to United States financial markets due to a 30-percent withholding tax that will be placed on their American source income.