The Impact of IRS Rules on the Caribbean
Some in the Caribbean wait patiently for stronger unity through an institution like CARICOM or maybe even ALBA; that connects the various territories in this archipelago that stretches from the Bahamas down to Suriname. Then there are skeptics like me who think we already have a working Caribbean union with the US dollar as the true common currency, headquarters for the region’s elite in South Florida, and entities like Nestle, Unilevel, Digicel, Neal and Massy, Guardian Holdings, RBC, First Caribbean, Scotia Bank, Republic Bank, Rituals Coffee, Prestige Holdings, SM Jaleel, Holiday Foods and even Blue Waters treating the wider region as a single marketplace. No need to wait for a Caribbean union – it is already here.
As a region, the Caribbean is inextricably linked to the United States. There is no need for me to comment on how the region is socially connected to the US. Economically, the biggest industry by any measure is tourism, and the biggest source market for the region’s tourism product remains the United States. For so many reasons, it makes sense that the region pays attention to U.S. politics, and these days, the discussion needs to be about the changes in US tax regulations.
To be more specific, I see three distinct interest groups in the region that may or should now be concerned – American residents in the region, the region’s financial institutions, and territories that promote so-called off-shore financial services. The reason is simply the U.S. government’s more aggressive stance on taxing its citizens.
Let us start with individuals. Almost everyone in the Caribbean has a relative or friend with either a green card or a US passport. Some of them live in the States. Some have returned to live in the region. The US, however, is the only country that taxes its citizens/residents on their worldwide income even when they are not resident in the US. So aside from being obliged to file tax returns even when living overseas, the Bank Secrecy Act has led to Americans' need to declare overseas bank and financial accounts over a certain level (known as FBAR regulations) or pay particularly high penalties for failing to do so.
This leads us to the region’s financial institutions. Perhaps recognizing that many Americans (either resident in the States or overseas, including those in the Caribbean) do not declare overseas income and financial assets, the IRS is now going a step further. Essentially, regional financial institutions will be required to report depositors/investors they believe to be Americans to the IRS (under something called FATCA). The incentive for these Foreign Financial Institutions (FFIs) to comply would be to avoid withholding penalties imposed on their US assets. Obviously, regional operations of Canadian banks like RBC and Scotia would take piggyback on what their Canadian operations are already doing, so the real compliance headache (new processes and new administrative costs) would fall on indigenous entities like Republic, First Citizens, First Caribbean, Unit Trust, etc.
This leads me to the impact on Caribbean territories themselves. Five European countries have already cut a deal with the American government, which means that their financial institutions report Americans to their respective European government, who, in turn, report details to the US government. Are individual islands thinking about that option? Also, some islands must be unsure about what the eventual impact will be. Would their resident offshore financial institutions pack up shop in frustration, or are they poised to benefit from the increasing number of Americans renouncing their citizenship in favor of economic citizenship programs such as Dominica or St Kitts?
One comment under a recent FATCA article in the internet edition of the Wall Street Journal noted that the Americans got the Swiss banks to do something that the Nazi regime failed to do even at the height of its power – surrender citizens' names with secret accounts. Some speculate that resentment of American infringement of national sovereignty will increase worldwide once these regulations are fully implemented. Time will tell how this turns out, but it is a reminder that citizenship is both a privilege and a responsibility.
In the meantime, tell your American friends and family to make sure that they report their foreign accounts this year in their 2011 returns. The reason being that when FATCA starts being phased in from next year, the IRS may find out anyway. If the IRS finds out on their own, that will cause a whole lot more trouble.
My name is Derren Joseph, and I love my country, and I love my region. Despite our current challenges, I continue to have the audacity of hope that we will all enjoy a brighter tomorrow.
Read more on derrenjoseph.blogspot.com.
Note: The blog that used to be here is now at https://www.mooresrowland.tax/.