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Cayman Islands: The 'whys and wherefores' of FATCA withholding

16 January 2015   (0 Comments)
Posted by: Author: Peter Stafford
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Author: Peter Stafford (DMS Offshore Investment Services)

The IRS wants to know who you are. If you receive US source with-holdable payments or have a financial account with a Foreign Financial Institution ("FFI"), the US Internal Revenue Service ("IRS") really wants to identify and classify you for the purpose of the Foreign Account Tax Compliance Act ("FATCA").

Working in concert, the US Department of the Treasury has now conscripted 114,764 FFIs and 112 foreign governments (as at November 30, 2014) via Intergovernmental Agreements ("IGAs"), in addition to US Withholding Agents ("USWAs"), to find out if you are or might be a person of interest, and require you to report your answer to the IRS.

These IGAs, classified as either Model 1 (under which FFIs report via their domestic tax authorities) or Model 2 (with direct reporting to the IRS), are helping to propagate FATCA's rapid global growth. An additional 8,117 FFIs from 118 other jurisdictions not subject to an IGA have also recognized that it is in their best interests to register with the IRS and comply with onerous FATCA customer due diligence, withholding and reporting obligations.

Regardless of whether you are US or foreign, it will cost you and your counterparties and financial institutions time and money to document just who you are. If you fail to provide withholding certificates and identification documentation in time, your payor/financial institution is compelled to make a series of unfavorable presumptions about your tax status. The presumptions also apply if your payor/financial institution has "reason to know" that documentation is "unreliable or incorrect." These new international tax compliance rules are designed to help the IRS clamp down on tax evasion by US taxpayers in respect of their undisclosed or underreported foreign ( i.e. , non-US) assets.

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Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

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