The US tax compliance net will spread to catch people with pension portfolios, highlighting the extent to which financial businesses need to get their client details in order as deadlines approach, a technology firm has warned.

As wealth managers know, FATCA (Foreign Account Tax Compliance Act), which is designed to prevent expat US citizens evading tax, has prompted some firms to complain that such individuals are now too expensive to serve, while other financial institutions, such as Royal Bank of Canada, London & Capital and Swissrisk, are looking to tap into this business of “unwanted Americans”.

But although all such legislation has unintended or unforeseen consequences, the FATCA legislation, passed in 2010 and designed to take full effect by 2015 with some intermediate deadlines beforehand, is one of the most controversial changes to date. The US threatens to slap a 30 per cent withholding tax on any foreign financial institution – a wide definition – that does not take steps to prove it has established if any clients are from the US.

Jim Muir, director of financial data management at data reconciliation company AutoRek, said pension schemes are among those FFIs that are in the potential firing line from FATCA.

“It seems to be absolutely certain that pension income will be included for FATCA purposes as the traditional annuity is easy to assess for liability...it will apply to other cash distributions such as 'Tax Free Cash' or income drawdown. Complexities over valuation of a pension pot that isn't delivering income (especially a defined benefits plan) may mean that plans which have not yet moved into maturity will need to be excluded in the early days," he said.

“Complex arguments around refund of premiums which have been tax relieved or otherwise will no doubt surface but my sense and judgment would be that businesses should prepare for the worst even though it may not quite materialize on day one,” Muir said.

Muir said that AutoRek works in the business of information and data reconciliation, a business that is seeing considerable demand from banks and other institutions trying to cope with the data demands of FATCA and similar regulations. AutoRek has 35 staff in Scotland and 15 in other countries, such as Ireland and other parts of the UK. It has clients in Spain, Switzerland, the US, the former Soviet Union and the UK.

His comments add to concerns about how compliance with regulations is now biting a large chunk of wealth managers' earnings. Some wealth management firms are spending up to half of their net profits on complying with a rising burden of regulation, with the cost standing at more than £400 million (around $628 million) in 2010, according to recent research from ComPeer.

Withers, the international law firm, said pension-holders need to be aware of the FATCA impact.

“Broadly, the proposed regulations under FATCA appear to try to exempt 'real' pension and retirement funds from the requirement to enter into FFI agreements with the US Internal Revenue Service and the need to comply with FATCA withholding and reporting," Kristin Konschnik, partner, said in an emailed note to this publication.

"Briefly, many retirement and pension funds may be treated as 'deemed compliant' FFIs (provided they meet certain requirements, including regarding their tax status, sources of contributions and contribution limitations), while other retirement plans that qualify for the benefits of a US income tax treaty may be treated as 'exempt beneficial owners'."

"Further, accounts held at certain types of retirement and pension funds should not be treated as 'financial accounts' under the proposed regulations (which presumably means they would not be US accounts subject to FATCA reporting or withholding). While it is still too early to tell precisely how the FATCA regulations will be finalized, the proposed regulations attempt to expand the number of non-US pension and retirement plans that may be able to avoid the more onerous application of the FATCA regime," Konschnik added.

Pensions

The issue of how FATCA could hit people in the pensions space has not yet been appreciated, Muir said.

"It is a big problem at the moment; we will find some companies and life companies who might deny this is a problem for them," he said. However, in the case, for example, where an Anglo-American couple divorces and there is a pension pot arising, that pension money could be taxable for US purposes, raising the FATCA compliance problem,” Muir continued.

"A good piece of advice to anyone is to think the worst," he said. "We are almost being inundated with queries about our services from people," he said.

FATCA is an acronym to take its place in the compliance lists alongside such tongue-twisters as the European Union’s MIFid market changes, the European Union’s AIFMD regulations on alternative investments, and the UK regulatory changes to financial advisors, known as the RDR.