The law that’s driven crackdowns on American tax evasion via Swiss bank accounts is coming to the Cayman Islands as well. Banks in the Caribbean archipelago will be subject to the Foreign Account Tax Compliance Act (FATCA) when the law goes into effect in mid-2014 under an agreement struck between the U.S. and Cayman governments in August.
The Caymans, made famous as a tax haven by dozens of popular movies long before Mitt Romney’s use of the island as a home for his money became a 2012 campaign issue, appears to be embracing FATCA. The law offers a menu of different options for countries to comply with its information sharing requirements, and the Caymans have chosen the one that places responsibility with the government rather than with private companies. Under the agreement struck this month, Bloomberg reports, the Cayman government will be responsible for collecting information on American-held bank accounts valued at over $50,000.
That sort of agreement, dubbed “Model 1” in FATCA terms, preserves “the benefit of discretion” for the Cayman government, according to Bloomberg BNA. It also places the legal responsibility for providing full and accurate information with the government, rather than leaving that liability with the firms. The U.K., Ireland, Spain, Germany, and Denmark have all chosen Model 1 agreements.
Switzerland opted for a “Model 2” version, whereby banks must report the information to the American Internal Revenue Service (IRS) themselves. Swiss banks have been accused of aiding trillions of dollars’ worth of tax evasion by Americans over the years, and are beginning to cooperate with the IRS even ahead of FATCA implementation. That shift owes largely to a 2012 indictment that eventually forced the oldest bank in Switzerland to close its doors after a quarter millennium.
As FATCA comes online and the threat of serious enforcement of tax evasion laws cajoles the world’s tax havens into cooperating more fully with the IRS, America’s finances stand to gain substantially. Demos estimates the country lost fully $3 trillion from 2001-2010 due to tax evasion – or more than half of the national debt added in the Bush years. Offshore bank accounts aren’t responsible for all of that sum, but by getting access to information on where Americans are hiding their money from the tax man the government hopes to crack down on one of the primary drivers of annual deficits.
Progress on the other major component of that $3 trillion in lost revenue per decade is murkier. Corporate tax avoidance, unlike individual evasion schemes, is largely within the letter if not the spirit of U.S. tax law. Apple caught flak this spring when the Senate held a hearing on the strategies that have helped the tech giant avoid paying any taxes on close to $100 billion in profits, but no one accused the company of a crime. It had simply navigated the seams between various tax code provisions in such a way that it didn’t technically owe any country any taxes on that money. Those flaws in the international corporate tax code allow corporations to pay lower tax rates than middle-class families. But international leaders have made little progress on solving that problem.