7 Deadly Myths Of FATCA: Cayman Islands Investment Funds

Introduction

It is quite a human trait to live in a state of suspended disbelief - when the news is just too bad to absorb, or when the consequences of an action are too much to contemplate.

Response to the Foreign Account Tax Compliance Act (FATCA), it seems, is one of suspended disbelief by some in the Cayman funds industry. Many opinions have been expressed - yet few facts presented - despite the explicit details being freely available in the FATCA regulations and the Cayman Islands Model 1 Intergovernmental Agreement with the U.S. (IGA). There are even those eagerly promoting half-truths and fanciful thinking about the legislation and peddling them to the unsuspecting.

As the rest of the world marches inexorably towards the implementation of FATCA on July 1 this year, these widely circulated myths are interfering with the timely preparation that Cayman Reporting Financial Institutions (CRFIs) should be making on their own behalf, for the benefit of their investors, to avoid the severe penalties for non-compliance that FATCA dictates.

We refer to them as the Seven Deadly Myths and those who subscribe to them could find themselves facing potentially crippling circumstances after July 1. For safety's sake, we get down to brass tacks and present the facts below - in plain language - to debunk these myths.

Myth 1: No action required now.

This is false. In fact, critical action is required before July 1, when all CRFIs must have implemented a FATCA Compliance Program to comply with Annex I of the IGA. CRFIs must self-certify their FATCA status [Chapter 4 of the U.S. Internal Revenue Code] to their withholding agents by either providing a Global Intermediary Identification Number (GIIN) or new IRS Form W-8BEN-E/W-8IMY prior to this date. This is the commercial reality facing all CRFIs using withholding agents (counterparties) subject to FATCA.

Two types of FATCA status are available to CRFIs when filing new W-8s: (1) registered deemed-compliant or (2) reporting Model 1 FFI. Registered deemed-compliant status is fast, final and foolproof. The other is temporary (for six months) and requires explanation, negotiation and monitoring with counterparties. It will be evident to those experienced in dealing with withholding agents on a daily basis, which FATCA status is most prudent, easier, and in the best interests of the CRFI to mitigate its counterparty and operational risk.

Myth 2: Best to "wait and see" for Cayman Islands enabling legislation.

This is false. Wishing this to be the case does not make this so. To be clear, registration and reporting are distinct functions under FATCA. All FATCA registration is directly with the IRS and is occurring now through the end of 2014. FATCA Reporting will be made to...