The Cayman Islands, one of the leading offshore jurisdictions for private funds with international capital, signed a tax information agreement with US tax authorities.
Under the agreement, financial institutions based in Cayman will supply local authorities with information on any of their US account holders. Cayman authorities will then relay that information to the Internal Revenue Service. US-based financial institutions will not need to share information on accounts owned by Cayman citizens under the deal.
“There is no real need for the agreement to be reciprocal given there is nothing for the US to report back to Cayman,” said one offshore lawyer speaking to PE Manager. The lawyer said that in practice a Cayman citizen is very unlikely to be using a US vehicle to hold assets.
The deal comes as part of an effort by the US government to clampdown on tax avoidance. The Foreign Account Tax Compliance Act (FATCA), signed into law in 2010, requires foreign financial institutions (FFIs), which include non-US private equity firms with US investors, to enter into a reporting relationship with the Internal Revenue Service (IRS) or face a hefty 30 percent withholding tax on certain payments that travel outside the US.
Other countries to have recently signed FATCA tax information exchange agreements include the UK, Costa Rica, Ireland, Spain, France, Germany, Mexico, Norway and Denmark.