FATCA: What you need to know

FATCA – or the US Foreign Account Tax Compliance Act – could have a significant impact on UK pension schemes and their members. PP looks at the what you need to know in this exclusive guide…

What is FATCA?
FATCA is shorthand for the US Foreign Account Tax Compliance Act. The US government introduced FATCA in 2010 to crack-down on the use of offshore accounts by American citizens to avoid paying their tax bill.

Why should UK pension funds be concerned?
The Act compels ‘foreign financial institutions' - almost any financial institution outside of the US - to register with the Internal Revenue Service and report US nationals 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.

As it stands, UK pension funds would have to register with the IRS and meet the reporting requirements or face the withholding tax being applied to US assets or payments.

How difficult would it be to comply?
Compliance could be a near impossible task for schemes, as the rules could extend to not only to members and policyholders who are US citizens, but also include spouses or family members who would receive pay-outs upon the member's death. Putting procedures in place could be a "costly and administrative nightmare" for schemes (5 January - www.professionalpensions.com/2135280).

Would all UK pension schemes be affected?
Any schemes with beneficiaries who were US nationals could be affected by the new rules.

Schemes with a high allocation to US equities/assets or an international workforce would likely be the most-affected. But even schemes without direct investments in the US could still find themselves facing a withholding tax because of pooled funds or US income through indirect sources.

When would it come into force?
‘Foreign financial institutions' will have to enter into a "special agreement" with the IRS by June 30, 2013. The withholding tax will be phased in the following year.

What happens next?
The IRS is due to publish further guidance later this month, followed by the final regulations in the summer.

Could the new guidance grant UK pension funds a full exemption?
There is a chance that UK pension funds could receive a full exemption. The Treasury has been in discussions with their US counterparts about the implications for the UK, including its impact on schemes.