FATCA has changed the tax position of companies working with US clients and Cayman captives would do well to consider its effects. Tim Min unpicks some of the complexities.
On March 18, 2010, the US Congress added Sections 1471 through 1474 to the Internal Revenue Code. These provisions are commonly known as the Foreign Account Tax Compliance Act, or FATCA.
"The FATCA regulations indicate that a depository account does not include an advance premium or premium deposit recieved by an insurance ocmpany, provided such premium is payable annually."
FATCA generally requires US withholding agents to withhold a 30 percent tax on certain payments to foreign financial institutions (FFIs) that do not agree to report certain information to the Internal Revenue Service (IRS) regarding their US accounts, and on certain payments to certain non-financial foreign entities (NFFEs) that do not provide information regarding the US owners of such payments.
FFIs and NFFEs
Every non-US entity is either a FFI or a NFFE. They are mutually exclusive categories. The FATCA regulations define the following entities as financial institutions:
• Depository institutions;
• Custodial institutions;
• Investment entities; and
• Insurance companies (or holding companies that are a member of an expanded affiliated group that includes an insurance company) that issue or are obligated to make payments with respect to a cash value insurance or annuity contract.
FATCA imposes a 30 percent withholding tax on ‘withholdable payments’ made to FFIs that do not have an agreement in effect with the IRS under which the FFI agrees to obtain and report information with respect to each US account maintained by the institution. Generally, FFIs are required to report annually the name, address, account balance and payments for each US account holder.
The term ‘withholdable payment’ includes payments of interest, dividends, rents, salaries, wages, annuities, and other fixed or determinable annual or periodic gains, profits and income if such payment is from sources within the US, and any gross proceeds from the sale or other disposition of property of a type that can produce interest or dividends from sources within the US, unless such payment is effectively connected with a US trade or business.
Similarly, FATCA imposes a 30 percent withholding tax on withholdable payments to a NFFE if the beneficial owner or payee of such payments does not provides certain information to the withholding agent and the withholding agent reports the information to the IRS.
In some cases, foreign law prevents an FFI from complying with FATCA and entering into an agreement with the IRS which would require the FFI to report on US accounts maintained by such financial institution. In such cases, the US Treasury Department has collaborated with other governments to develop two alternative model intergovernmental agreements (IGAs) that facilitate FATCA implementation and reduce burdens on FFIs.
Under a Model 1 IGA, reporting FFIs would satisfy their obligations under FATCA by reporting specified information about US accounts to their government, followed by the automatic exchange of that information on a government-to-government basis with the US in a manner that is consistent with local legal and regulatory constraints under which they operate.
On March 15, 2013, the Cayman government announced that, after considerable consultation with its financial services industry, it will seek to enter into a Model 1 IGA with the US.
Under a Model 2 IGA, reporting FFIs would report specified information about US accounts directly to the IRS in a manner consistent with the FATCA regulations, supplemented by a government-to-government exchange of information on request.
On October 29, 2013, the IRS issued Notice 2013-69 that provides guidance for FFIs directly entering into agreements with the IRS and those reporting through a Model 2 IGA. The draft FFI Agreement set forth in Notice 2013-69 requires the FFI to register with the IRS and obtain a global intermediary identification number.
The FATCA regulations define an insurance company as an entity that is a company regulated as an insurance company in its country of operation, has gross income arising from insurance, reinsurance, and annuity contracts that exceeds 50 percent of gross income, or has assets associated with insurance, reinsurance and annuity contracts that exceeds 50 percent of gross assets.
Global insurance companies can rely on local law designations in determining whether their business units qualify as an insurance company.
Notice 2013-69 indicates that the Treasury and the IRS intend to modify the definition of a US person in the FATCA regulations to include a foreign insurance company that is not a specified insurance company and that elects under IRC§ 953(d) to be taxed as a US company. As a result of this proposed change in the FATCA regulations, property and casualty insurance companies with IRC§ 953(d) elections generally should not be subject to FATCA reporting, even if the company is not licensed to do insurance business in any US state.
Insurance and reinsurance premiums are included in the definition of withholdable payment. Consequently, insurance companies and insurance brokers that pay reinsurance premiums to a foreign reinsurer will be subject to FATCA.
The FATCA regulations indicate that a depository account does not include an advance premium or premium deposit received by an insurance company, provided such premium is payable annually and the amount does not exceed the annual premium required under the contract.
An indemnity reinsurance contract between two or more insurance companies is not treated as a financial account based on the definition of a cash value insurance contract. In indemnity reinsurance contracts, the ceding company maintains contractual relationship and liability with each insured. Although indemnity reinsurance is excluded as a financial account, reinsurance premiums are still considered withholdable payments.
BDO can provide assistance to companies in the Cayman Islands regarding their obligations under FATCA. Please contact Tim Min, Paul Arbo, or Glen Trenouth for more information.
Tim Min is managing director, tax at BDO. He can be contacted at: firstname.lastname@example.org
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