British Virgin Islands: BVI Concludes Negotiations With US On FATCA
The British Virgin Islands Government has today announced the conclusion of negotiations with the United States on a Model 1 Intergovernmental Agreement (IGA) under the US Foreign Account Tax Compliance Act (FATCA).
In a statement the Ministry of Finance of the BVI Government said the final text of the agreement has been initialled paving the way for its imminent signing and implementation. The initialling of the agreement comes after several months of dialogue with the US Treasury. The final text of the IGA will be published after the document is formally signed, a process that is expected to take a further week or two.
The BVI is expected to put into place shortly the final legal and administrative procedures to facilitate, as well as issue guidance notes on, the implementation of the IGA.
The Model 1 IGA is an agreement between governments for automatic exchange of information in tax matters. BVI Reporting Financial Institutions will be required to identify US accounts and report specified information about those US accounts to the BVI competent authority. The BVI competent authority will then pass this information to the Internal Revenue Service (IRS) on an automatic basis. As a result of the IGA, BVI Financial Institutions (FIs) will be “deemed compliant” with the requirements of FATCA and will not be subject to the withholding tax that would otherwise be applied by US withholding agents. Although the final text is not yet available, we can say with some certainty that the definition of Reporting Financial Institution will closely follow the FATCA Regulations and will broadly comprise Custodial Institution, Depository Institution, Investment Entity, and Specified Insurance Company. In practice, this will cover banks, custodians, nominees, trust companies and trusts, investment funds, administrators, managers and advisers, as well as certain insurance companies. The IGA will include a number of exemptions in Annex II the detail of which will only be available once the text of the IGA is made available. Unless they can avail of one of the exemptions, FIs will be obliged to undertake prescriptive due diligence obligations for identifying reportable accounts under the IGA.
Once the IGA has been signed, it will still need to be brought into force by the BVI through the introduction of legislation and relevant guidance. Reporting commences in 2016 with respect to 2014 and 2015 and then annually thereafter. Pre-existing accounts to which very different due diligence requirements will apply include all accounts opened up to 30 June 2014. FIs opening new accounts after 30 June 2014 will be required to conduct due diligence on the account holder and, in the case of accounts held by entities, on the ultimate beneficial owners in accordance with Annex I of the IGA.
Although BVI reporting Financial Institutions will not report to the IRS they will still need to apply for a Global Intermediary Identification Number (GIIN) from the IRS and register as Registered Deemed Compliant Foreign Financial Institutions. Obtaining a GIIN will provide independent certification to withholding agents of FATCA compliance. Once the IGA has been signed, BVI Reporting Financial Institutions will be able to register and obtain a GIIN. They will not be required to provide a GIIN to withholding agents prior to 1 January 2015. Concern has been expressed by some industry observers that withholding agents may insist on a GIIN being produced from 1 July 2014 when FATCA is due to come into force. US FATCA Guidelines clearly provide that a Reporting Financial institution in a Model 1 IGA jurisdiction does not need to provide a GIIN prior to 1 January 2015 although the guidance qualifies this statement by providing that FIs are required to register and obtain a GIIN prior to 1 July 2014 if:
- They maintain one or more branches (other than a Limited Branch or US Branch) in jurisdictions that are not covered by a Model I IGA;
- They are renewing their status as a Qualified Intermediary, Withholding Foreign Partnership or Withholding Foreign Trust; or
- They intend to be a Lead FI for one or more Member FIs that are not established in, and operating exclusively in other Model 1 IGA jurisdictions.
The IRS is due to publish the first list of GIINs on 2 June 2014. In order to be on this list, a financial institution must submit its application online no later than 24 April 2014.
FATCA is due to come into force on 1 July 2014. There was some speculation that a further delay would be announced. However, this has been all but discounted by the release of the “last substantial package of regulations necessary to implement [FATCA]” by the US Treasury on 20 February 2014. Preparation by all BVI financial institutions should be commenced immediately although final actions will need to wait until the final text of the IGA is available. The steps to be taken can be summarised as follows:
(a) Identify whether each entity is a Financial institution (FI) or Non-Financial Foreign Entity (NFFE);
(b) Consider whether any FIs may fall within any of the Annex II exemptions.
(c) Determine whether each Reporting FI needs to register with the IRS;
(d) Commence classification of existing account holders and gathering of missing information in line with Annex I of the IGA;
(e) Prepare updated client on boarding procedures for new account holders from 1 July 2014