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.
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.
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.
