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30 Nov, 2013 02:28

Cayman Islands agrees to report US citizens’ offshore assets under controversial law

Cayman Islands agrees to report US citizens’ offshore assets under controversial law

The Cayman Islands has signed an agreement with the United States to combat offshore tax evasion pursuant to a controversial 2010 law that has caused some notable US expatriates to revoke their US citizenship.

The US Department of the Treasury announced Friday the US has signed an intergovernmental agreement with the Cayman Islands to enforce the Foreign Account Tax Compliance Act (FATCA) in what it bills as an effort to promote transparency.

In the Cayman Islands – one of the world’s largest offshore financial centers - foreign financial institutions (FFIs) will be required to share tax information about US account holders with the IRS via the Cayman Islands Tax Information Authority.

Passed by Congress in 2010, FATCA seeks to snuff out Americans avoiding US taxes overseas by requiring FFIs to report yearly to the Internal Revenue Service (IRS) on US citizens holding over $50,000 at a year’s end. Should FFIs refuse to share the information, US financial institutions are ordered to withhold a portion of payments made to the FFIs. The FFIs can make agreements directly with the IRS or follow one of two kinds of agreements their host country signs. The Caymans’ agreement is a Model 1B agreement; a different agreement signed Tuesday with Costa Rica is a Model 1A.

"By working together to detect, deter, and discourage offshore tax abuses through increased transparency and enhanced reporting, we can help build a stronger, more stable, and accountable global financial system.  We look forward to collaborating with the Government of the Cayman Islands to further these objectives," said Julie Nutter, Minister-Counselor for Economic Affairs at the US Embassy in London, in a statement. Nutter signed the agreement for the US on Friday.

The Cayman Islands signed a similar agreement with the United Kingdom early this month.

"These agreements underscore growing international cooperation in the effort to end tax evasion everywhere,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack.

Yet FATCA requirements are also putting a strain on American expatriates in dual citizenship households that don’t have lavish funds hidden abroad, or that include a non-American spouse or partner who finds the IRS prying into their financial data as invasive, news service McClatchy reported Friday.

“My husband cannot understand why Americans are so offended by having their personal emails and phone calls monitored by the (National Security Agency) yet are very comfortable requiring a Canadian to hand over their bank account data, which is far more sensitive,” said Ruth Anne Freeborn, an expat who has lived in Ontario for over 30 years. She decided to forego her citizenship - she was born in Oklahoma - in September.

Freeborn’s husband, with a yearly salary of $51,000, is the family’s sole income earner. He was opposed to sharing his financial data with the US following the passage of FATCA.

“My decision was either to protect my Canadian spouse and child from this overreach or I could relinquish my US citizenship,”
she said. “It was with great sorrow I felt I had to relinquish, but there was no other choice for me and many like me.”

The amount of citizenship renunciations has gone up from 742 in 2009 to over 1,854 thus far in 2013, according to the State Department. Some estimate the number is much higher based on foreign media reports.

In addition, expats say FATCA is causing many overseas banks and financial institutions to “close out longstanding accounts of American clients, refuse to open new ones, and deny loans and mortgages to expats rather than face a US penalty if they don’t comply with the tax law,” McClatchy reported.

Wealthier expats may be hiding money overseas, yet most expats like Freeborn are at the mercy of the law.

Entertainer Tina Turner - who has lived in Switzerland for over 20 years and is married to a Swiss citizen - relinquished her US citizenship this month at the US Embassy in Bern. And Facebook co-founder Eduardo Saverin forewent his citizenship last year and now lives in Singapore. The move saved him $67 million in US taxes, financial experts estimate.

Meanwhile, proposals in Congress to revisit the law have stalled.

“FATCA is a textbook example of a bad law that doesn’t achieve its stated purpose but does manage to unleash a host of unanticipated destructive consequences,” said Sen. Rand Paul (R-KY), when he introduced his bill to repeal FATCA this year. “Tax evasion is a problem that should be addressed, but not in an egregious way.”

The US agreed Tuesday to send Costa Rica tax information to its government regarding Costa Rican citizens with accounts in the US.

The US has signed 12 FATCA intergovernmental agreements since the law’s passage. Treasury says its has reached 16 agreements “in substance” and is pursuing many others.