Uncle Sam has become the personification of the American Government, and many of us can picture the stern looking gentlemen pointing his finger at us with the caption “ I want you”. This poster featuring this caption was part of a recruitment drive for both World Wars.
Perhaps now there should be a new poster with a caption “I want your QROPS to pay tax!’’. In this case the war is against non-declared earnings outside of the USA. Here I am referring to FATCA (Foreign Account Tax Compliance Act).
This is a Federal law that requires US citizens, wherever they may live, and US tax residents to report their non-US investments and earnings to the IRS (Internal Revenue Service). This also, importantly, extends to foreign financial institutions who must report any investments of an US citizen or US taxpayer to the IRS.
Shoot First And Ask Questions Later
The IRS are taking no prisoners with the new rules and will enforce foreign tax compliance. In fact, we have seen a foreign investment institution in Malta write to non- US citizens/non- US taxpayers about their QROPS who have no links to Uncle Sam at all.
The letter sent to investors of all nationalities pulls no punches as this excerpt shows-
“We understand that you are not a US individual and therefore it would be greatly appreciated if you would kindly confirm by completing the attached W8-BEN form in line with the applicable legislation and return a copy to us first via scan and then in original by courier at least by the end of xxxxxx 2015.“
And
“In the event that you fail to provide satisfactory information by the end of xxxxxxx 2015,xxxxxxxxx Limited may take such action as it may deem appropriate in line with legislation and regulations on this matter.“
Shock and Inconvenience
One can only wonder what sort of a shock this hard hitting letter will give to those with no connections to the US, not to mention the time taken to comply and pay for a courier. However, this will be nothing like the concerns those with US connections will have.
QROPS- US Citizens/tax residents
The extract of this letter came from a QROPS provider in Malta. Many US citizens and expats living in the USA have been advised to move their pensions to “Tax Compliant” Malta QROPS from UK pensions.
As a result of an enquiry made to the IRS, they have indicated that under ordinary circumstances transfers between states (UK and Malta in this case) would not come under Article 18(1) of the 2001 United Kingdom-United States Double Tax Treaty, and the distribution may be viewed as taxable, as it was unlikely to be deemed a tax-deferred rollover distribution.
The IRS said as an explanation that plans outside of the U.S. are not recognized as qualified plans, and cannot be transferred from state to state as a tax-free transfer, such as one can (what the US IRS call a rollover) from a qualified plan to another qualified plan such as an US IRA or 401k.
UK Pensions – US Citizens / Tax residents
Those that hold UK schemes can refer to the IRS release in May 2010 which states-
“If an employer pension scheme in the United Kingdom and an SIPP are both pension schemes within the meaning of Article 3(1)(o), then a transfer of income earned by the employer pension scheme to the SIPP would not be a taxable event in the United States.”
Far more reassuring that the view about transfer to QROPS!
Is Uncle Sam Gonna Get Me?
As yet, it seems that the issue of transfers of US citizens and US taxpayers from UK pensions to QROPS has not yet become case law. But surely, the risk of this is a worry for those that have moved their UK pensions without getting professional tax advice.
Anyone considering such a move had better be sure that the advice to do so is robust or the consequences could be catastrophic with penalties of up to 50% applied by the IRS.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was published in April 2015
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