FATCA is a law introduced in the USA to root out overseas tax avoidance. Starting in January 2014 (although it has been deferred twice so far!), Foreign Financial Institutions will be required to:
- register with the US Internal Revenue Service (IRS),
- provide information to the IRS regarding any US taxpayers who are “account holders” and
- deduct, and remit to the IRS, 30% of any proceeds of US securities paid to US account holders.
UK pension schemes fall within the definition of Foreign Financial Institutions. However, they may not know whether they have any US taxpayers as beneficiaries (since these might be, for example, spouses of deferred members who have moved abroad). Furthermore, any such beneficiaries of defined benefit schemes have no say in the investment policy of the scheme, so are highly unlikely to be using the scheme for tax avoidance!
Fortunately sense has prevailed and the UK and US governments have agreed a reciprocal disclosure treaty under which HMRC and the IRS will keep each other informed regarding taxpayers of the other country benefitting from arrangements with financial institutions in the UK and the US respectively. One corollary of this is that low-risk vehicles such as “pension schemes or other retirement arrangements” established in the UK will be exempt from the reporting requirements of FATCA, as will ISAs, save-as-you-earn (SAYE) schemes and premium bonds.