Louise Somers
Mourant, Cayman Islands
louise.somers@mourant.com

Introduction

In 2014, the Organisation for Economic Co-operation and Development (OECD), working with the G20 countries, developed the Standard for Automatic Exchange of Financial Account Information in Tax Matters (the ‘AEOI Standard’). The AEOI Standard provides for the annual exchange between tax authorities of a predefined set of information on financial accounts held by individuals and entities resident in a foreign jurisdiction. The Common Reporting Standard (CRS) is the global standard for the automatic exchange of tax information.

The purpose: in a financial sector that has become increasingly globalised, the AEOI Standard provides tax administrations with powerful information to assist with addressing international tax evasion. There are now over 110 jurisdictions exchanging information on over 111 million financial accounts, with a total value of €11tn. To date over €114bn in tax, interest and penalties can be attributed to the implementation of the AEOI Standard.^[1]

The situation in the Cayman Islands

The Cayman Islands was one of the first countries to commit to implementing the AEOI Standard and completed its first exchange in 2017. The Department for International Tax Cooperation (DITC) is the government agency that administers the AEOI Standard in Cayman. According to the publicly available United States Foreign Account Tax Compliance Act (FATCA) Foreign Financial Institution List^[2], the Cayman Islands have more financial institutions than any other jurisdiction in the world and, in fact, this number exceeds the second largest by more than double.  

Since 2017, the OECD’s Global Forum on Transparency and the Exchange of Information for Tax Purposes (the ‘Global Forum’) has been monitoring and reviewing the global implementation of the AEOI Standard.

The Global Forum has already completed its assessment of the AEOI legal frameworks, concluding that the Cayman Islands’ legal framework is in place and consistent with the requirements of the AEOI Terms of Reference.^[3] The focus has now turned to the more onerous job of ensuring that the AEOI Standard is being implemented effectively in practice. This involves ensuring that financial institutions are properly implementing the due diligence and reporting rules, as well as ensuring that jurisdictions are carrying out the required exchanges of information.

The Global Forum published a report^[4] on 9 December 2022, presenting the effectiveness ratings for 99 jurisdictions. The report gives the Cayman Islands the highest rating of ‘on track’. This is very positive news for the Cayman Islands, which continually reiterates its commitment to global standards on transparency and tax information exchange.

Despite achieving top marks, it is certainly not the time for Cayman financial institutions to rest on their laurels. In the same report, the Global Forum confirmed that it is putting in place a second round of peer reviews, which will be more in-depth and robust. This second round of reviews will involve a more detailed assessment of the effectiveness of each jurisdiction’s administrative compliance framework and their exchange of information in practice, and will have a particular focus on the quality of the information reported.

What are the practical consequences?

Cayman financial institutions should expect that the compliance efforts we have seen from the DITC over the past 12-18 months will continue and likely increase. In addition, the jurisdictions receiving information on Cayman financial institutions through the automatic exchange will be more rigorously reviewing this data. The report hints that there will be a particular focus on accurate reporting of tax identification numbers (TINs), dates of birth and addresses.

Accordingly, further compliance queries, audits, investigations and other enforcement measures, including administrative fines, should be anticipated. In conclusion, if there was ever a time for Cayman financial institutions to take a step back and review their CRS obligations, and their compliance with those obligations in practice, it is now.^[5]