US legislation known as FATCA, passed last year, mean foreign firms will have to prove to the US authorities that they are not liable to pay any US taxes, or they will automatically face a withholding penalty of 30 per cent on their returns - a potentially heavy fee that could drive some firms away from serving US clients.

The wide scope of these laws will cost banks billions of dollars in developing new compliance systems, likely outweighing the estimated revenue gains of $8 billion that US tax authorities expect to achieve in the next 10 years, Pascal Bérichel, global head of fund distribution services and chief executive EFS Fund Distribution Services, told this publication in a recent interview.

At the heart of the legislation is the requirement that an institution has to prove that a client is not connected to the US in any way. This requires deep analysis of a client’s portfolio and circumstances. The legislation can mean that any institution, anywhere in the world, even if it thinks it has no connection whatsoever to the US, can be required to file data with the US Internal Revenue Service, he said.

“It but according to FATCA, that does not go far enough,” he said.

The private banking industries in places such as Switzerland and Luxembourg will face some difficult choices, given bank secrecy laws, he said. Some of these institutions may seek some kind of legal waiver under US laws.

US institutions operating abroad are likely to be the most immediately affected by FATCA, he added.