The British Virgin Islands (BVI) has become the first offshore domicile to pursue a non-reciprocal information exchange agreement under the US’ Foreign Account Tax Compliance Act (FATCA).
The tax agreement, known as an intergovernmental agreement (IGA), is a modification of the most common IGA Model 1.
The model 1 is a reciprocal agreement that provides financial firms, including private equity houses, a way to report tax information on any US investors through their local authorities as opposed to having to create a direct relationship with a foreign agency. In return the US provides tax information on foreign investors in the US.
However, the BVI is pursuing what is known as a Model 1B agreement which is identical to the Model 1 but doesn’t require the US to provide tax information to the BVI.
Some offshore legal sources do not believe such an agreement will have an impact on the desirability of BVI as a fund domicile.
“There is no real need for them to be reciprocal given the relatively simple taxation regime in the BVI,” said one offshore tax lawyer, adding “there is nothing for the US to report back to the BVI”. The lawyer said that in practice a BVI citizen is unlikely to be using a US vehicle to hold assets anyway.
In addition to these agreements, both Cayman and BVI announced that they plan to sign up to the UK’s version of FATCA.
The UK first explored the idea of a 'FATCA-style' regime back in August when the UK's International Development Committee (IDC) recommended the introduction of “legislation similar to the relevant section of FATCA”. Since then Jersey, Guernsey and the Isle of Man have all made headway in taking part in the tax agreement.
The move to bolster tax agreements has been high on the agenda for many countries as the Organisation for Economic Co-operation and Development and the European Union continue their scrutiny of international tax practices.
Earlier this month the five biggest European economies (UK, Germany, France, Spain and Italy) issued a letter to the European Commission signaling their desire to pilot a Europe-wide FATCA and urging other member states to join.