Updates on Automatic Exchange of Information (AEOI)Cayman Islands Compliance Association (CICA)

Peter StaffordHead, AEOI (Acting), Department for International Tax Cooperation

Wednesday, 21 March, 2018 | Grand Cayman

Disclaimer: This presentation is intended to give

a general overview of the topics addressed and cannot be relied upon for any legal purposes

Agenda

1. Country-by-Country Reporting (CbCR)

2. Common Reporting Standard (CRS)

3. CRS Mandatory Disclosure Rules (MDR)

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Country-by-Country Reporting

(CbCR)

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CbCR - BEPS

• OECD/G20 Base Erosion and Profit Shifting Project (BEPS)

– Refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations

– BEPS distortions: MNE affiliates in low tax countries report almost twice the profit rate (relative to assets) of their global group

• BEPS Package includes 15 Actions

• Under the BEPS Inclusive Framework over 110 countries and jurisdictions, including Cayman, are collaborating to implement the BEPS measures

• Cayman’s “CbCR Regulations” implement BEPS Action 13

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CbCR – Transfer Pricing

• BEPS Action 13 Transfer Pricing and Country-by-Country Reporting

– Transfer pricing refers to prices charged between related parties (e.g. a parent company and its controlled foreign corporation) in an intercompany transaction

• Intercompany transactions are eliminated on the parent’s consolidated financial statements

• Intercompany transactions are not eliminated tax purposes

• Transfer pricing between related entities in different countries with different CIT rates can affect the MNE Group’s profits

– CbCR is designed to enhance transparency for tax administrations by providing them with adequate information to assess high-level transfer pricing and other BEPS-related risks

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CbCR – MNE Group• CbCR only applies to MNE Groups

• Important definitions:

– “Group”

• collection of enterprises related through ownership or control such that it is either

– required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or

– would be so required if equity interests in any of the enterprises were traded on a public securities exchange

– “Excluded MNE Group”

• any Group where previous year’s annual revenue < US$850MM (€750MM)

– “MNE Group”

• Any Group that is not an Excluded MNE Group

i.e. largest 10-15% of all Groups which own 85-90% of all assets

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CbCR – Entities• Constituent Entity:

– Any entity that is part of an MNE Group

– CbCR Regulations only apply to Constituent Entities that are “resident in the Islands”

• incorporated or established

• place of effective management

• subject to financial supervision (CIMA)

DITC expects a few thousand in Cayman, i.e. only a very small percentage of all Cayman companies, partnerships and trusts

• Reporting Entity

– Two types

• Ultimate Parent Entity

• Surrogate Parent Entity

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CbCR - Notification

• CbCR Guidance – http://www.tia.gov.ky/pdf/CbCR_Legislation.pdf

• CbCR Portal – expected later this week

• Notification via the CbCR Portal

– Required for every Constituent Entity resident in the Islands

– Reporting Entity

• Appoints a Primary Contact and a Secondary Contact

• One notification for all Constituent Entities resident in the Islands

– templates: Authorisation Letter; CSV formatted CE File

• DITC issues a “CbCR ID” to the Reporting Entity

– Deadline for notification:

• 15 May 2018 if Reporting Entity is also resident in the Islands

• 30 Sept 2018 if Reporting Entity is not resident in the Islands

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CbCR - Reporting• Reporting via the CbCR Portal

– Every Reporting Entity resident in the Islands must electronically file a CbC Report

– Reporting deadline this year is 31 May 2018

– TIA must transmit CbC Messages by 30 June 2018 to other jurisdictions participating in CbCR

• CbC Report

– XML schema prescribed by the OECD

• OECD (2017), Country-by-Country Reporting XML Schema: User Guide for Tax Administrations

• Includes reportable information on Reporting Entity and each Constituent Entity (wherever resident):

– Residence

– Revenues from related parties and from unrelated parties; profits; taxes paid and accrued; employees; non-cash assets

• Includes a summary of MNE Group’s activities 9

Common Reporting Standard

(CRS)

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CRS - Preparation• Cayman Financial Institutions

– comply with obligations under CRS Regulations

• Core documents:

– Cayman:

• Tax Information Authority Law (2017 Revision) and Schedules

• CRS Regulations 2015 and 2016 Amendment (revised in Q2.2018)

• CRS Guidance Notes v3.0 (revised 15 March 2018)

• CRS Lists of Participating Jurisdictions and Reportable Jurisdictions(revised 5 January 2018)

• AEOI Portal User Guide (FATCA & CRS) v4.0 (revised 15 March 2018)

• Self-Certifications (Individual & Entity) (revised 15 March 2018)

• DITC’s AEOI News and Updates

– OECD:

• CRS and Commentary (Second Edition) (2017 replaced 2014)

• CRS Implementation Handbook (Second Edition is imminent)

• Automatic Exchange Portal

• CRS-related Frequent Asked Questions

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CRS Timeline (historical)

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31 December 2015 Pre-existing Accounts in scope for due diligence procedures

1 January 2016 onward

New Accounts requiring self-certification by the customer

31 December 2016 Complete review of Pre-existing High-Value Individual Accounts

End of first CRS reporting period

30 June 2017(30 April in future)

Cayman Financial Institutions complete initial registration on AEOI Portal (available from 17 May 2017)

13 September 2017(31 May in future)

Cayman Reporting Financial Institutions and Trustee Documented Trusts complete initial reporting on AEOI Portal

30 September 2017

TIA completes first transmission of CRS reports to OECD Common Transmission System (CTS) for onward transmission to relevant Reportable Jurisdictions; recipient Competent Authorities’ inquiries to TIA will follow

31 December 2017 Complete review of Pre-existing lower value Individual Accounts

Complete review of Pre-Existing Entity Accounts

CRS Timeline (ongoing)

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5 January 2018 CRS lists of Participating & Reportable Jurisdictions updated

15 March 2018 CRS Guidance Notes v3.0 replaces v2.0

15 March 2018 AEOI Portal User Guide v4.0 replaces v3.2.1

15 March 2018 AEOI Portal reopens with new CRS and FATCA features

30 April 2018 CRS / FATCA – deadline for CFIs to notify (register)

31 May 2018 CRS / FATCA – deadline for CFIs to submit Returns

30 September 2018 CRS / FATCA deadlines for transmission to CTS / IDES

31 December 2018 CRS due diligence remediation of Controlling Persons

2018 CRS Regulations 2018 Revision expected

2020 Global Forum AEOI Peer Reviews of CRS Implementation

Participating Jurisdictions

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Appendix 2 to the CRS Guidance Notes v3.0(Extraordinary Gazette 2-2018)

Andorra France Nauru

Anguilla Germany Netherlands

Antigua and Barbuda Ghana New Zealand

Argentina Gibraltar Niue

Aruba Greece Norway

Australia Greenland Pakistan

Austria Grenada Panama

Azerbaijan Guernsey Poland

Bahamas, The Hong Kong (China) Portugal

Bahrain Hungary Qatar

Barbados Iceland Romania

Belgium India Russian Federation

Belize Indonesia Saint Kitts and Nevis

Bermuda Ireland Saint Lucia

Brazil Isle of Man Saint Vincent and the Grenadines

British Virgin Islands Israel Samoa

Brunei Darussalam Italy San Marino

Bulgaria Japan Saudi Arabia

Canada Jersey Seychelles

Cayman Islands Korea Singapore

Chile Kuwait Sint Maarten

China Latvia Slovak Republic

Colombia Lebanon Slovenia

Cook Islands Liechtenstein South Africa

Costa Rica Lithuania Spain

Croatia Luxembourg Sweden

Curaçao Macau (China) Switzerland

Cyprus Malaysia Trinidad and Tobago

Czech Republic Malta Turkey

Denmark Marshall Islands Turks and Caicos Islands

Dominica Mauritius United Arab Emirates

Estonia Mexico United Kingdom

Faroe Islands Monaco Uruguay

Finland Montserrat Vanuatu

Now 102 Participating Jurisdictions with more to follow in 2019 and 2020

Reportable Jurisdictions

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Appendix 3 to the CRS Guidance Notes v3.0(Extraordinary Gazette 2-2018)

In 2017 there were 45 Reportable Jurisdictions

Reportable Jurisdictions

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Appendix 3 to the CRS Guidance Notes v3.0(Extraordinary Gazette 2-2018)

In 2018 there 45 more Reportable Jurisdictions added; the total is now 90

CRS – Guidance Notes

• CRS Guidance Notes v 3.0 replace 2.1

(Industry Advisory lists the key changes)

– Entity Self-Certification – new form for corrected definition of Controlling Persons of Account Holder that is a legal person classified as a Passive NFE under CRS (page 17)

– Lists of Participating Jurisdictions and Reportable Jurisdictions

– FI in liquidation must arrange for service provider to perform obligations arising prior to dissolution which require performance / completion after dissolution (e.g. maintain books and records post dissolution)

– FI migrating from the Cayman Islands to another Participating Jurisdiction

– Indirect distribution by trust

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CRS – AEOI Portal

• AEOI Portal User Guide v 4.0 replaces 3.2.1

(Industry Advisory lists the key changes)

– Principal Point of Contact (PPoC) change request – new process

– Authorizing Person (AP):

• change request – new process

• profile on AEOI Portal solely to make PPoC change requests

– FI deactivation - new process (previously referred to as FI termination)

– A CFI will be permitted 90 days from the date the TIA sends an email notification to the CFI’s PPoC that it must correct any error(s) in its CRS return

– New validation rule for FATCA Returns for Preexisting Individual Account Holder where the CFI has the date of birth but has been unable to obtain the US TIN

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AEOI Error Notifications

• The AEOI Portal Team will contact CFIs on a individual basis regarding error notifications for 2016 CRS / FATCA Returns

(there are not many instances)

• DITC and IRS are resolving the issues with missing GIINs and missing US TINs in respect of certain historical FATCA Returns

– The AEOI Portal has improved validations which prevent reoccurrence of those particular types of errors

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Regulatory compliance & enforcement

1. Overview:

– Criminal fines / administrative penalties of CI$50,000 (generally CI$20,000 for individuals)

2. Source:

– Tax Information Authority (International Tax Compliance) (Common Reporting Standard) (Amendment) Regulations, 2016

– Summarized by CRS Guidance Notes v2.0, Section VII (includes “liability grid”)

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CRS Enforcement• CFIs liable for contravening

obligations under Part 2 of CRS Regs.

• Representatives (fiduciaries, etc.) may have imputed liability (i.e. CFI to individual)

• CFIs may have vicarious liability (i.e. from representative to CFI)

• Other persons may be liable for causing breach of confidentiality, unauthorized tampering with information or hindering the TIA

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CRS – Compliance Monitoring

• DITC must be satisfied:

1. CFIs are correctly classified, and that all those with reporting obligations are reporting to the TIA via the AEOI Portal

2. CFIs’ due diligence processes correctly identify all Reportable Persons

3. CFIs are correctly reporting the data on Reportable Persons to the TIA via the AEOI Portal

• DITC will undertake relevant compliance work, for example:

– Review data on the AEOI Portal:• indicators of non-compliance with notification and/or reporting obligations by CFIs

• incorrect classifications of CFIs and/or account holders

• CFIs at high-risk of non-compliance and/or poor due diligence

– Comparison of data on the AEOI Portal to external sources

– Requests for additional supporting information from CFIs where indicated

– Reviews of due diligence procedures and documentation and other evidence held by CFIs as appropriate

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CRS – 3rd Tranche Regulations

• CRS Regulations to be amended and administrative procedures to be implemented to include:

– requirements for CFIs to submit additional information annually via the AEOI Portal on due diligence and internal controls for CRS compliance

– appropriate audit / inspection mechanisms

• DITC regulates approx. 60,000 CFIs

– Over 90% are Investment Entities; over 90% reporting

– Cayman Investment Entities outsource their AML, accounting and CRS compliance functions to service providers worldwide

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Anti-avoidance

The CRS Regulations deem to be invalid any arrangements designed to avoid CRS obligations

• The rule may apply to wide and varied situations

• The commentary on Section IX, CRS provides some examples.

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CRS Mandatory Disclosure Rules

(CRS MDR)

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CRS MDR – OECD / EU• OECD Model (proposed)

– CRS Mandatory Disclosure Rules on Avoidance Arrangements and Opaque Offshore Structures (CRS AA OS)

– MDR is designed to provide tax administrations with information on CRS AA OS, including the users and those involved with their supply

• This information can be used for compliance purposes and to inform future tax policy design

• MDR should have a deterrent effect against the design, marketing and use of CRS AA OS.

• EU MDR-type amendment to DAC 6

– EU Commission recently proposed a Council Directive to adopt MDR-type rules by amending the EU Directive on administrative cooperation in the field of taxation (DAC 6):

• disclosure of potentially aggressive tax planning arrangements

• exchange of this information between tax administrations26

CRS MDR – AA OS

• CRS Avoidance Arrangement (AA)

– designed to, marketed as or has the effect of, circumventing CRS or exploiting absence of CRS

• Opaque Offshore Structure (OS)

– An Offshore Structure is a Passive Offshore Vehicle (POV) that is held through an Opaque Ownership Structure (OS)

• POV is an offshore Entity that does not carry on a substantive economic activity supported by staff, equipment assets and premises

• OS is designed to have, marketed as having, or has the effect of allowing a natural person to be a Beneficial Owner of a POV while obscuring such person’s beneficial ownership or creating the appearance that such person is not a Beneficial Owner.

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CRS MDR - Intermediaries• Promoters

– responsible for the design or marketing of CRS AA OS

• Service Providers

– provide assistance or advice with respect to the design, marketing, implementation or organisation of that CRS AA OS (“Relevant Services”)

• MDR disclosure requirements

– Intermediaries

– Taxpayers (end users)

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Questions

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