FATCA uncertainty continues for schemes

Schemes face continuing uncertainty over the US Foreign Account Tax Compliance Act, despite the publication of further regulations.

The US Treasury eased the compliance burden of FATCA yesterday by allowing some foreign governments, rather than financial institutions, to collect financial data on American citizens and relay it to US authorities.

The US issued a joint statement with the UK, French, Italian, Spanish and German governments setting out an agreed approach to FATCA which will see reciprocal agreements put in place to weed out tax-dodgers on either side of the Atlantic.

But it remains uncertain whether UK pension funds will be "deemed to comply" with FATCA or if they will still have to identify and report US citizens on their books to the British government.

Investment Management Association head of tax Jorge Morley- Smith said: "We know that there is some wording around pensions in the current draft regulations and there have been changes but we're not at the moment sure if those changes are an improvement or not.

"In particular what appears to be the case the exemption for pension funds has been changed so that other conditions are met but it's not obvious that those conditions would apply to UK pension funds."

Allen & Overy US tax partner Stephen Fiamma said there was not a "blanket exemption" for pension funds, but the regulations could exclude large defined benefit and defined contribution schemes.

He said: "It's quite a complicated set of tests and it's not clear whether any particular type of pension arrangement will meet them.

"Most schemes should meet the exemption and as time goes on we'll get more guidance on this but at the moment the guidance is general in nature so it's difficult to say with certainty that any particular scheme would benefit."

He pointed to self-invested personal pensions as an area of conflict as they may not meet a requirement that no one person can own more than 5% of a fund's assets.

Hogan Lovells senior associate Nicola Rondel explained the FATCA draft regulations were clearly intended to exempt foreign retirement plan FFIs from the requirement to withhold tax on income from US investments.

She said: "The regulations enable a foreign pension scheme to qualify for certified deemed-compliant status if it accepts only employer, employee and government contributions limited by reference to earned income, no single beneficiary has a right to more than 5% of the FFIs assets and either contributions that would normally be subject to tax are deductible or excluded from a beneficiary's gross income, the taxation of investment income attributable to the beneficiary is deferred, or 50% or more of the total contributions to the FFI are from the government and the employer.

"However, the requirement that any contributions to the plan must be 'limited by reference to earned income' means that UK pension schemes are likely to fall outside the exemption because employer contributions will not always be limited in this way."

The regulations criteria for a "retirement fund" to be exempt include:

- Contributions must consist only of employer, government, or employee contributions and must be limited by reference to earned income.

- No single beneficiary may have a right to more than 5% of the assets.

- Contributions must be excluded from the income of the beneficiary and/or taxation of the income attributable to the beneficiary must be deferred under the laws of the country in which it is organised or operates.

- Or it must receive 50% or more of its total contributions from the government or employers.