How to mitigate double taxation

  • To understand where double taxation may occur.
  • To learn how to mitigate double taxation for clients.
  • To understand whether insourcing or outsourcing of tax technology might be best.
How to mitigate double taxation

Build, buy or outsource? Managing withholding tax reclamation on investments can pose an issue for advisers.

Each time an investment is made on a cross-border basis there is a risk than any income derived from that investment will be taxed twice.

A common instance of this double taxation issue is the ‘judicial double taxation’ where the same income is taxed twice, in the country where the income was derived and in investor’s home country.

Article continues after advert

This can discourage cross-border investment as the investor is the subject of double taxation.

Many countries have entered bilateral tax agreements with the intent of reducing or even outright eliminating double taxation.

A list of the countries with whom the UK has entered into tax treaties can be found on the government's website - although with Brexit looming, some of these may need to be renegotiated as part of the terms of the UK's exit from the European Union and the single market. 

Because of these bilateral tax agreements, investors can reclaim the taxes paid in those countries which they have agreements with. 

However, some investors and their advisers still believe that the withholding tax reclamation process is so complex and labour-intensive that this outweighs the advantages of having any cross-border investments.

But with the right technology and support, this is simply not true. Indeed, many investors are waking up to this fact and are demanding that their fund managers take steps to ensure that their returns are maximised and that measures are in place to return what is owed.

But what is the best way to achieve this? While some companies may consider managing the reclamation process themselves, the arguments in favour of outsourcing or buying a commercial enterprise solution from a qualified tax reclaim provider can be compelling.

Our research shows that approximately £13.2bn of investors’ rightful returns from foreign shares and bonds are lost because withholding tax on dividends and income is not being fully reclaimed.

UK investors suffered the biggest losses out of all major European markets, missing out on £910m in recoverable returns, a significant rise since 2012 (£756m).

Investors domiciled in the US relinquished £2.5bn, up from £1.8bn two years previously.

Despite rises in developed markets, the research also reveals a net decrease of 15 per cent in global losses due to unclaimed withholding tax between 2012 and 2014.

This reflects a reduction in dividend pay-outs in emerging markets and the fall in bond yields since our previous study a few years ago. In fact, we estimate that average tax reclamation rates have improved by 5 per cent since our previous report on the global tax reclamation landscape in 2013.

What is unclaimed?

Currently just under 23 per cent of excess tax remains unclaimed each year.