Investments  

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.
CPD
Approx.30min

Levels of unreclaimed tax will continue to rise unless fund managers’ service providers – often custodian banks – improve reclamation levels.

Increasingly savvy investors, in markets where high yield investments are harder to come by, are putting the fund management community under growing pressure to maximise their investment returns.

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Successful implementation can enhance clients’ portfolio performance by between 0.10 per cent and 0.15 per cent. So it is no surprise that tax reclamation services can be a major differentiator when it comes to service offering for high net worth individuals. 

With just a little effort, significant sums can be recovered for your clients.  

Broadly, here are three approaches to reclaiming withholding tax: building an in-house solution, buying an ‘off-the-shelf’ solution, or outsourcing the operation.

One general principle applied to the build vs outsource decision is that when you need to automate a commodity business process, outsourcing makes sense.

However, when you are addressing a core process that differentiates your company, building a system of your own may be the way forward.

The reality for most financial services firms is that tax reclamation is rarely considered a core business process. While certainly tax reclamation services can provide edge for financial service firms, they require technical expertise that can be expensive to hire.

That said, banks, brokers and other financial institutions that provide securities trust, custody and related services for clients often have an obligation to perform these services either under local fiduciary standards, regulations or customer service level agreements.

The fact is that many organisations have been forced to recognise this obligation by either their regulators or their clients and have had to decide whether to build, buy or outsource. 

Technology 

The business of filing tax reclaims is not rocket science. However like rockets themselves, it has many moving pieces that require constant vigilance and attention to detail.

The technology platforms that support tax reclaims need to have the functionality to account for and manage changes over time in many details such as investor tax status, income types, tax rates, filing regulations, reclaim forms, tax treaties, and other requirements imposed by various actors in the value chain. 

For example, in 2016, the Danish tax authorities published new tax directions, according to which the limitation period for reclaiming excess dividend withholding tax was reduced from five to three years.

Similarly, a Dutch lower court recently ruled that dividend payments from the Netherlands to South African corporate entities with 10 per cent or more ownership in the company are not subject to Dutch dividend withholding tax.

According to EY, many Dutch companies that have withheld 5 per cent dividend withholding tax under the NL-SA Treaty after 18 March 2012 were able to claim a refund based on this court case (the deadline for refund claims with respect to 2012 dividends was 31 December 2015).