The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is pushing to remove a clause in the Bahamas’ draft Foreign Account Tax Compliance Act (FATCA) agreement with the US that would commit this nation to deepening its involvement with Europe and the OECD on tax information exchange.

Dr Nicola Virgill-Rolle, the director of financial services, yesterday told a Society of Trust and Estate Practitioners (STEP) luncheon that the Bahamas was determined to restrict the intergovernmental agreement (IGA) to something that was “FATCA specific only”.

Emphasising that the Government was working through the IGA to “identify key issues we’d like to see removed”, Dr Virgill-Rolle said it was especially focused on the IGA’s proposed Article Six.

This is titled ‘Mutual Commitment to Exchange of Information’, and in its current form extends well beyond FATCA to require the Bahamas to “develop common reporting and exchange of information” systems with the European Union (EU) and the Organisation for Economic Co-Operation and Development (OECD).

“We will look particularly at this,” Dr Virgill-Rolle reassured STEP members. “It talks about a commitment to work further with the OECD and EU, but we think this document should speak to FATCA only.”

Pointing out that the Ministry of Financial Services had been working with the Ministry of Finance to conclude the IGA negotiations with the US, she added: “We’ve identified benchmarks, and looked at all the agreements out there, identifying key issues we’d like to see removed from the IGA......

“We want an agreement that implements FATCA only, not any others.”

All this indicates that the Government is keenly aware of the implications if it signed up to the draft IGA with the Internal Revenue Service (IRS) and US Treasury as is.

The existing Article Six contents would effectively commit the Bahamas to working towards a FATCA-style, automatic exchange of information-type arrangement with its main nemesis, the OECD, and the key European drivers of its anti-international financial centre (IFC) agenda.

While the Bahamas will likely be forced down the automatic exchange of tax information road with non-US nations at some point in the future, to preserve the financial sector’s competitiveness it is right to reject any attempt by the US to extend the IGA beyond FATCA.

Mrs Virgill-Rolle, meanwhile, confirmed this nation would have to amend its existing Tax Information Exchange Agreement (TIEA) with the US to facilitate the ‘automatic exchange of tax information demanded by FATCA.

“We’d need to amend the TIEA slightly to include Article 4 - the automatic exchange of information - in the case of the US only,” she explained.

“The IGA is not a treaty for the US, and there is no basis for the automatic exchange of information. We have to rely on the TIEA, and have to put amendments into the TIEA to allow for the automatic exchange of information.”

Rival IFCs, such as the Cayman Islands, are having to do the same. The Bahamas’ existing TIEA, and supporting legislation, only allows this nation to exchange tax information with the US upon request, hence the need for amendments.

However, the Bahamas is somewhat fortunate in that it has one TIEA for the US, and a separate one for all other nations, thus enabling it to amend the former without committing itself to the automatic exchange of information with others.

Mrs Virgill-Rolle also revealed that the Government had initially viewed the Model 2 IGA as the Bahamas’ best means of FATCA compliance, only to be swayed towards Model 1 by the financial services industry and the exemptions granted to this nation’s key products.

“I must admit, at the start of the process we leaned towards Model 2,” she confirmed, only for the financial services industry to indicate it “strongly preferred” Model 1.

While only Japan and Switzerland to-date have opted for a Model 2 IGA, which commits all their financial institutions to sign individual agreements with the IRS, the Bahamas is negotiating a Model 1.

This will require all Bahamas-based financial institutions to supply the Government with the required information on US clients, with the latter then passing this on to the IRS/US Treasury.

Mrs Virgill-Rolle said the Bahamas had opted for a “non-reciprocal” IGA with the US, meaning the latter will not be obligated to pass on information on Bahamian taxpayers held within its jurisdiction.

This, though, may raise questions about whether the Bahamas has missed an opportunity to obtain information on the numerous Bahamian companies that evade Customs duties via transfer pricing with ‘dummy companies’ they have established in the US.

Mrs Virgill-Rolle added that the proposed Bahamian IGA also defined financial institutions “more widely” than domestic laws, while the broad definition of a ‘US person’ would impact “account opening and due diligence procedures”.

The exchange of information, under the FATCA IGA, will start in September 2015 for Bahamian institutions’ existing accounts as at June 30, 2014, and any new ones opened subsequently.

“The IGA quite clearly sets out a staggered approach to this,” Mrs Virgill-Rolle said. “By September 2016 it gets a little bit more detailed; they look at interest payments occurring with those [US] accounts.

“From 2016 onwards, you’re going to be doing the full FATCA, with all the bells and whistles required.”

The financial services director added that the Government was also seeking “more clarity” from the US on the registration requirements for Model 1.

“We were under the impression there was to be a lighter touch for Model 1,” she said. “We don’t see that yet.”

Mrs Virgill-Rolle also suggested that FATCA might force the Bahamas to do “some further work” in modifying its pension legislation, clarifying how the sector was regulated, given the USA taw law’s demands.

And she disclosed that the IRS initially wanted to directly approach Bahamian financial institutions that supplied incorrect FATCA information, something the Bahamas was “strongly against”.

The IGA now obligates the Government here to obtain the correct information from Bahamas-based providers, while ‘third party’ companies are still allowed to do due diligence for FATCA purposes.

“We’re very happy about that; we see it as a nice industry [compliance] that we can develop here,” Mrs Virgill-Rolle said. “But the responsibility remains with the institution, and we as the Bahamas government mustn’t circumvent FATCA.”

FATCA, which was brought into law in March 2010, is a set of rules set out by the US Internal Revenue Service (IRS) designed specifically to limit tax evasion by US persons living abroad.

Under FATCA, US taxpayers holding financial assets outside the US must report them to the IRS or face a 30 per cent withholding penalty. FATCA will also require foreign financial institutions to report directly to the IRS certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.