Cayman Islands: Penalty regime under CRS enforcement guidelines

Cayman Tax Information Authority (TIA) issued enforcement guidelines v1.0, with respect to the common reporting standard (CRS) and economic substance (ES) frameworks. Read TaxNewsFlash

These CRS enforcement guidelines [PDF 937 KB] set out the enforcement process and subsequent penalties for failures to comply by any persons within the scope of TIA’s compliance monitoring and enforcement authority.

The CRS enforcement guidelines are divided into nine sections:

• Overview
• Administrative penalties
• Investigatory functions of the authority
• Breach notice
• Contesting a proposed penalty on its amount
• Penalty notice
• Appeals process
• Payment of penalty and interest
• Notice templates

The CRS enforcement guidelines are only applicable to those under the administrative penalty regime of the CRS regulations, and do not extend to the criminal provisions of the CRS legislation. The intent of the administrative procedures of the enforcement guidelines is to provide for effective implementation of the CRS legislative measures, including:

• Rules to prevent any financial institutions, persons or intermediaries from adopting practices intended to circumvent the reporting and due diligence procedures
• Rules requiring “reporting financial institutions” to keep records of the steps undertaken and any evidence relied upon for the performance of the above procedures and adequate measures to obtain those records
• Administrative procedures to verify compliance by reporting financial institutions with the reporting and due diligence procedures, and administrative procedures to follow up with a reporting financial institution when undocumented accounts are reported
• Administrative procedures to determine that the entities and accounts defined in domestic law as “non-reporting financial institutions,” financial institutions, and “excluded accounts” continue to have a low risk of non-compliance
• Effective enforcement provisions to address non-compliance

The tax authority may impose a “primary penalty” of up to 50,000 CI (approximately U.S. $61,000) for offenses by a financial institution, as well as “continuing penalties” of 100 CI (approximately U.S. $122) for each day that a violation continues.

The tax authority’s procedure for imposing penalties will be to initially issue a breach notice, potentially followed by a penalty notice. The statute of limitations for issuing notices of penalties is the earlier of (1) one year after becoming aware of the breach, or (2) six years after the breach occurred. Notices will be issued by email to the principal point of contact of a financial institution using the email address registered on the Department of International Tax Cooperation (DITC) portal. If the principal point of contact is not available, the notice will be sent to the authorised person, and if neither is available, the notice will be sent to the registered office address of the financial institution. Notices served on individuals will be served directly on that person electronically. The penalty amounts on the notices are not final and may be appealed by a financial institution within 60 days of the penalty notice.

The following list provides examples of what the tax authority may prioritize during reviews:

• Incorrect submission of undocumented accounts
• No authorized person or principal point of contact registered on the DITC portal
• Incorrect entity classification
• Failure of a financial institution to register on the DITC portal and notify its classification and reporting obligations
• Failure to submit a CRS filing declaration
• Failure to submit a CRS compliance form
• Incorrectly reporting, or failing to report, a reportable account in a CRS XML return
• Incorrectly reporting, or failing to report, the taxpayer identification number or date of birth of account holders or controlling persons

Financial institutions under review need to have their books and records, written policies and procedures, self-certifications and other documentary evidence readily available for the tax authority.

While the potential primary penalty imposed on each financial institution (excluding continuing penalties) may be up to 50,000 CI, it is important to note the separate amounts for each offense. Some of the more notable offenses and their respective penalties are:

• Failure to establish and maintain written policies and procedures under the CRS—penalty of 7,500 CI (noting there are three other offenses related to failure to comply with policies and procedures under the CRS)
• Failure to register on the DITC portal by the notification deadline of 30 April—penalty of 37,500 CI
• Failure to provide an update via the DITC portal to inform the tax authority of changes to reporting obligations, entity classification, or authorized users—penalty of 10,000 CI
• Failure to submit a CRS return—penalty of 5,000 CI (penalty per reportable account)
• Failure to submit a nil return or provide any further information (e.g., CRS filing declaration and CRS compliance form)—penalty of 10,000 CI
• Financial institution relies on self-certification that it knows or has reason to believe is inaccurate and makes a return based on this self-certification—penalty of 20,000 CI

For more information, contact a KPMG tax professional:

Jigna Patel | jignashapatel@kpmg.com