‘Costly nightmare’ for UK schemes if US cracks down on tax dodgers

A US crackdown on tax-dodgers could leave British schemes with an “administrative and costly nightmare”, a lawyer warns.

The US government introduced The Foreign Account Tax Compliance Act in 2010 to crack-down on the use of offshore accounts by American citizens to avoid paying tax.

The Act compels ‘non-US financial intermediaries’ – almost any financial institution outside of the US – to register with the Internal Revenue Service and report US citizens who hold assets or receive benefits. If institutions fail to comply they could face a 30% withholding tax on any income or payments from the US.

For UK pension funds compliance could be an almost impossible task, as the definition of a US citizen could extend to not only policyholders but also to spouses or family members who would receive pay-outs upon the member’s death.

Squire Sanders Hammonds partner Catherine McKenna (pictured) said FATCA was a “big unknown” for schemes.

She said: “If enacted as we think, or as is currently expected, it could impose tax on the schemes and compliance to notify in relation to payments that could go to the US nationals.”

McKenna added: “It’s imposing a regulatory and compliance burden outside the US jurisdiction for a tiny problem – certainly a tiny problem for the UK – where the burden is disproportionate to the benefit.”

She said the IRS will provide further guidance towards the end of January with the best case scenario being a full exemption for UK schemes.

The FATCA reporting requirements are set to come into force in 2013, with the withholding tax to be phased in the following year.

A spokesman for the Treasury said the implications for the pensions industry were under discussion.

He said: “The Treasury is in close dialogue with the US authorities on all aspects of FATCA. This includes discussion of any implications for the pensions industry. “The US is expected to issue further guidance shortly, which is likely to clarify the position.”