UK institutional investors are leaving $532 million of dividend income on the table by failing to claim withholding taxes back in full. Or so says a research report by GOAL, the London-based tax reclaim software application and consultancy firm which numbers several global custodians among its clients .
GOAL says that, from dividends and income paid in 2002, UK investors are entitled to reclaim $1.97 billion of withholding tax from their global portfolio earnings ($0.89 billion from debt market investments, $1.08 billion from equity market investments). However, adds GOAL, the global average for reclaims is only 73 per cent of full entitlement. Therefore, the firm calculates that UK investors are missing out on some $532 million (337 million) to which they are entitled, simply because it is not reclaimed from foreign tax authorities. This is made up of $240 million unreclaimed from debt market investments, and $292 million unreclaimed from equity market investments.
GOAL says the annual tax withheld on cross-border securities dividends/income, at September 2002, amounted to almost $70 billion worldwide, of which just over $24 billion was reclaimable by investors and their fund managers. Custodians are estimated to have a potential fee income market from tax reclamation services of $483 million across the globe in reclaiming taxes.
GOAL reckons that in major markets, an average of almost 8 per cent of UK Investors’ returns from cross-border securities dividends/income are reclaimable, and these returns are at risk if withholding tax is not efficiently reclaimed. As investment portfolios have swung away from equities and into bonds, dividend/income yields (as opposed to equities capital growth) have risen in significance as a return on investment.
As a consequence, unreclaimed withholding tax now represents a proportionately far higher percentage of an investor’s total potential return. Fund managers, says GOAL, are coming under increasing pressure from investors to ensure that their custodian banks are efficiently and effectively reclaiming withholding tax. Fund managers are now actively seeking automated methods of being able to predict investor portfolio returns, taking into account the effect of withholding tax reclamation cash flows.
GOAL says that tax reclamation rates, rules and timings vary widely around the globe, making the reclamation process very complex. “However, automated systems are now available to take the cost and manual complexity out of the reclamation process,” says GOAL. “Fund managers and pension funds are becoming increasingly aware of the existence of such systems and are beginning to include the requirement for such automated facilities as a standard part of their custodian services RFPs. Leading custodians have recognised the market opening represented by effective tax reclamation services, both for their fund management clients, and as an interbank services opportunity. Automated reclamation facilities have now made the provision of such services highly profitable, in a market climate where other revenue streams are declining.”
GOAL points out that, with portfolios switching domestic to foreign markets and from capital growth to income and returns squeezed overall, reclaiming withholding tax on income was nevermore important. “Investors and fund managers are increasingly coming to understand the level of shortfall that unreclaimed withholding tax represents for them, and are putting pressure on custodians to reclaim tax efficiently and effectively,” says GOAL. “Fund managers are also starting to demand automated tools with which to offer their clients accurate predictions of investment returns incorporating the effect of withholding tax reclamation across multiple legislatures. And pensions funds, increasingly regulated and obliged to periodically review their custodian services, are beginning to include automated withholding tax reclamation in their RFPs. Investors and fund managers are keen to get the reclaimable portion of their tight investment returns back, and smart custodians are competitively positioning themselves with automated facilities to take advantage of the global $480m+ earnings market for withholding tax reclamation services.”