The Department of the Treasury recently announced that the Cayman Islands and Costa Rica have agreed to cooperate in the tax transparency sought by the Foreign Account Tax Compliance Act (FATCA). Pursuant to intergovernmental agreements signed by the Cayman Islands and Costa Rica, the two countries will make U.S. taxpayer account information available to the IRS in an effort to combat and deter offshore tax evasion.
Designed to obtain information on U.S. taxpayers who hold an interest in foreign accounts, FATCA requires U.S. financial institutions to withhold certain payments made to foreign financial institutions (“FFI”) that do not agree to report U.S. taxpayer account information to the IRS. FATCA provides a framework for FFIs to prevent those withholdings: an FFI can enter into an agreement directly with the IRS or through one of two possible agreements between the U.S. and the home country.
The Cayman Islands agreed to a Model 1B agreement where FFIs in the Cayman Islands will report information on U.S. account holders to the Cayman Islands Tax Information Authority, which will then relay that information to the IRS. The U.S. and the Cayman Islands also signed a new Tax Information Exchange Agreement, replacing the prior 2001 agreement.
Costa Rica agreed to a Model 1A agreement where FFIs in Costa Rica will provide account information to the IRS, and the U.S. will in turn provide information on Costa Rican account holders in the U.S.
The Cayman Islands and Costa Rica are the first Caribbean and Central American countries, respectively, to enter into agreements relating to FATCA compliance. [Both agreements can be found here.] They join ten other countries that have already pledged cooperation, including Denmark, France, Germany, Ireland, Mexico, Norway, Spain, and the United Kingdom. The Treasury Department announced that it has reached agreements with 16 other countries, further highlighting the government’s focus to obtain cooperation internationally in its efforts under FATCA to quell tax evasion.