Speaking Notes In Senate On The Bahamas and the United States Of The America Foreign Account Tax Compliance Agreement Bill, 2014

Speaking Notes In Senate
On
The Bahamas and the United States Of The America Foreign Account Tax Compliance Agreement Bill, 2014

By

SEN. THE HON. ALLYSON MAYNARD GIBSON, QC
ATTORNEY-GENERAL AND MINISTER OF LEGAL AFFAIRS

Friday 7th August 2015

Madam President

I stand to support the Bahamian and the United States of America Foreign Account Tax Compliance Agreement Bill, 2015. This bill is indicative of the significant role The Bahamas plays in the financial arena. The Financial Services section is continually evolving. This sector is the 2nd tier of our economy and if we are to remain relevant we must adapt and change. The provision of the necessary legal framework to support the new ways in which we must do business is critical.

The United States Foreign Account Tax Compliance Act (FATCA) was signed into United States (US) law in 2010 through the US Hiring Incentives to Restore Employment Act and came into force on 1st January, 2013. The purpose of FATCA is to impose new reporting requirements on financial institutions throughout the world with respect to providing certain financial information on US citizens for tax purposes.

Madam President

FATCA has global implications. It is a US law which reflects the development around the world in recent years in relation to the exchange of tax information. This development has been phenomenal. Sharing and exchange of tax information has evolved from information on request to automatic exchange of information. These advances have been described by the Organization for Economic Cooperation and Development (OECD) as the “expected new standard.” The OECD, which spearheads the initiative for a global standard for the automatic exchange of financial account information, cites FATCA as the catalyst for the move towards automatic exchange of information in a multilateral context.

Madam President

The expansion of global efforts for transparency and exchange of information for tax purposes seeks to address the vast amounts of money that are keep offshore and go untaxed by taxpayers who fail to comply with tax obligations in their home jurisdictions; in essence it seeks to effectively act against tax fraud and evasion. It should be noted that US citizens, which includes a U.S. citizen or resident individual and a partnership or corporation organized in the United States under US law, are taxed on worldwide income.

FATCA’s objective therefore, is to target tax non-compliance by US taxpayers with foreign financial accounts and offshore assets. It seeks to effectively achieve this objective by requiring financial institutions to enter into a Foreign Financial Institution Agreement directly with the United States Internal Revenue Service (IRS) to comply with FATCA or for Governments to enter into agreements with the United States government through an intergovernmental agreement (IGA) to allow their financial institutions to comply with FATCA. The intergovernmental approach to implementing FATCA reduces the cost and simplifies the compliance burden for financial institutions.

The intergovernmental approach has two models, Model 1 and Model 2. Pursuant to Model 1, partner jurisdictions agree to report to the IRS specified information about the US accounts maintained by all relevant Foreign Financial Institutions (FFI’s) located in the jurisdiction; while under Model 2, the partner jurisdiction agrees to direct and enable all relevant FFI’s located in the jurisdiction to report specified information about their US accounts directly to the IRS.

Under the Model 1 IGA, FFI’s are required to identify US accounts pursuant to due diligence rules contained in Annex I of the IGA and report specified information about their US accounts to the partner jurisdiction. The due diligence rules require FFI’s inter alia, to electronically review accounts for certain US indicia. Where the electronic search does not capture all of the information, a paper record search is required. The partner jurisdiction, in turn, reports such information to the IRS on an automatic basis. The information to be reported by the FFI’s is equivalent to that required to be reported by US citizens in their US tax returns. The exchange of information under a Model 1 IGA may be on a reciprocal or non-reciprocal basis.

Jurisdictions such as Australia, Canada, Cayman, France, Ireland, Italy, Jamaica and Barbados have signed intergovernmental agreements with the US to improve international tax information exchange based on the Model 1 IGA. Countries that have signed the Model 2 IGA (where FFI’s report direct to IRS) include Austria, Bermuda, Chile, Japan and Switzerland. Switzerland was one of the first jurisdictions to sign the Model 2 IGA, as this model addressed domestic legal impediments which precluded them from signing Model 1.

According to a LexisNexis Newsroom article on Tax Law, it was necessary for Switzerland to negotiate Model 2 as Swiss law prohibits financial institutions from acting on behalf of a foreign government and creates an offence where a person carries out activities on behalf of a foreign state without lawful authority. Under the Model 2 IGA, Swiss financial institutions have the guarantee that they will not be prosecuted in Switzerland if they report bank information to the IRS.

Countries that have signed the Model 2 IGA therefore, have selected this model primarily because, either certain domestic laws prevent their FFI’s from reporting directly to the IRS and complying with FATCA under Model 1, or because they are apprehensive about the potential costs of implementation, administration and enforcement in acting as the intermediary under Model 1.[1][1] Unlike Model 1, where information is exchanged annually via the partner jurisdiction with the IRS, Model 2 establishes a framework of direct reporting by foreign financial institutions to the Internal Revenue Service supplemented by information exchanged between governments and the United States government upon request.

As at 29th April, 2015, 52 countries have signed the Model 1 IGA and 7 have signed the Model 2 IGA with the US.

Madam President

As you are aware, on 3rd November, 2014 the Government of The Bahamas signed an Intergovernmental Agreement (Model 1- non-reciprocal), (hereinafter referred to as the “Agreement”) with the United States of America to implement FATCA. Pursuant to the Model 1 IGA, The Bahamas agreed to require Financial Institutions (FI’s) to collect and share with the Competent Authority (the Ministry of Finance) the relevant information on US Account Holders required under FATCA; the Competent Authority then collates and shares this information with the United States IRS. FI’s that do not comply with FATCA requirements face a 30% withholding tax on all of their US payments and will be deemed “non-Participating Foreign Financial Institutions”.

The Agreement sets out the obligations of The Bahamas Government for the implementation of FATCA and the requirements of Bahamas Financial Institutions to facilitate the Government in meeting those obligations. Annex I of the Agreement provides the due diligence procedures that The Bahamas will require its Reporting Bahamas FI’s (BFI’s) to undertake in relation to certain categories of accounts for individuals and entities. Annex II indicates those entities that are treated as exempt beneficial owners or deemed compliant FFIs.

To fully implement and comply with the obligations established by FATCA, the Government of The Bahamas is required to implement the necessary legal and operational framework. Consequently, this necessitates enabling legislation to require financial institutions to collect and report the necessary information to the Competent Authority for transmission to the IRS. Implementation of the proposed legislation will also allow for the FFI’s to meet the reporting deadline of 30th September, 2015 set by the IRS.

The United States of America Foreign Accounts Tax Compliance Agreement Bill, 2015”, which seeks to provide the necessary legal structure for the implementation of FATCA in The Bahamas.

The Bill is divided into five Parts:-

Part I
Provides for the short title and the definition of terms which will be used throughout the Act. Pertinent definitions include, the “Competent Authority” who is responsible to obtain the required information from the FFI’s and annually exchange the information with the IRS. Part I also highlights the purpose and objectives of the Act, notably inter alia, for implementing US FATCA and to provide for enforcing the giving of assistance by persons in The Bahamas in connection with performance of the obligations assumed by the Government of The Bahamas under the Agreement.

Part II
Clauses 4 -10
Provides for the duties and obligations of reporting financial institutions under the Bill. Notably, it defines those financial institutions required to report and the different types of accounts covered by the Agreement.

Clause 4
Provides a definition of a “Reporting Bahamas Financial Institution” for the purposes of this Act. Reporting Bahamas Financial Institutions (RBFI) includes those institutions which carry on business in The Bahamas as a Custodial Institution, a Depository Institution, an Investment Entity and a Specified Insurance Company. It should be noted that certain Entities, including the Central Bank of The Bahamas, The Government of The Bahamas and any international organization or wholly owned agency or instrumentality thereof, are exempt from reporting requirements and are classified as “Non-Reporting Bahamas Financial Institutions.”

Madam President

This bill imposes a duty on financial institutions to register with the IRS in accordance with the Agreement. BFI’s are required to register with the IRS and obtain a Global Intermediary Identification Number (GIIN). Registration with the IRS and compliance with the reporting requirements of the Agreement identifies the RBFI as a registered deemed complaint foreign financial institution and avoids the 30% withholding on US source payments. Additionally, the Minister may prescribe further registration requirements on the financial institution.

Clause 6
Imposes a duty on financial institutions to apply due diligence rules and procedures, as outlined in Annex I to the Agreement, to identify the account holder of any U.S. Reportable Accounts maintained by the institution. Financial institutions are required to review and identify accounts with certain US indicia and to report on those accounts.

Clause 7
Imposes a duty on financial institutions to obtain and file information returns of all U.S. Reportable Accounts. The information returns are to be filed in accordance with Articles 2 and 3 of the Agreement, with respect to the details to be specified, and the time and manner in which the information return is to be filed.

Clause 8
Imposes a duty on financial institutions to prepare and submit to the Competent Authority information returns even in circumstances where there are no reportable accounts. In such circumstances, the financial institution is required to submit a nil return for that calendar year, specifying the name of the institution, the address of the registered office, the GIIN allocated to the financial institution and any other information which may be prescribed by regulations.

Clause 9
Imposes a duty on financial institution to retain records created or obtained for the purposes of complying with the Act in a specified format and for a minimum period of five years. This minimum record keeping period is in keeping with the financial industry services standard.

Clause 10
Makes provisions to allow financial institutions to engage Third Party Service Providers to fulfil their obligations under the Act. However, the clause makes it clear that where a Third Party Service Provider is so engaged, the financial institution remains responsible for their duties and obligations under the Act.

Part III

Imposes obligations on the Competent Authority, which largely entails the obligations to obtain the required information from the financial institution and exchange the information with the United States Government.

Part IV

Clauses 13, 14 and 15

Provides for exempted owners, financial institutions and accounts. These include exempt beneficial owners in accordance with Annex II of the Agreement, such as the Government of the Commonwealth of The Bahamas, international organizations and the Central Bank. Also, deemed–compliant financial institutions and accounts are excluded from the definition of Financial Accounts.

It is noteworthy that included in the categories of Exempt Beneficial Owners, Deemed Compliant Financial Institutions and accounts excluded from Financial Accounts are certain trusts managed by professional/corporate trustees and some categories of Bahamian pension funds and other similar arrangements which meet certain criteria. The more significant criteria are that, (i) the pension funds are regulated under the laws of The Bahamas; and (ii) they report annually on their participants/beneficiaries to the relevant authorities. These exemptions are significant for the continued success of the financial services industry.

Part V

Provides for several miscellaneous provisions

Madam President

This section of the Bills speaks to the issues of confidentiality under the Act and explains that other than in connection with court proceedings, the Competent Authority must treat any information received from a financial institution as confidential and shall only disclose such information as necessary to carry out its obligations under the Agreement. This provision seeks to ensure an adequate level of protection for the exchanged information and that it is used only of the purposes specified in the Agreement.

Madam President

For The Bahamas, the implementation of FATCA can serve as a structural basis for the global move toward common reporting standards on tax information. The OECD has launched an aggressive agenda for the automatic exchange of tax information and many jurisdictions have signed on to commence automatic exchange via the common reporting standards effective 2017.

The legislative and infrastructural systems being developed in order to facilitate the full operation and procedural basis for FATCA’s full implementation into the fabric of The Bahamas’ financial services industry should be considered as a significant precursor to these anticipated future developments.

Madam President

I conclude as I began. The second pillar of our economy is financial services. This sector is constantly evolving and for us to stay in the game this jurisdiction must seen to be a properly regulated one. All of financial services business must be able to stand intense world class scrutiny. We are required to work in tandem with the OECD and other like bodies. It is for these reasons that I support this bill.