• Home
  • News
    • People moves
    • Africa
    • Asia
    • Australia
    • Canada
    • Caribbean
    • Domicile
    • Europe
    • Latin America
    • North America
    • Middle East
    • US
    • US
    • UK
  • Products
    • Funds
    • Pensions
    • Platforms
    • Insurance
    • Investments
    • Private Banking
    • Citizenship
    • Taxation
  • Fintech
  • Regulation
  • ESG
  • Expats
  • In Depth
  • Special Reports
  • Directory
  • Video
  • Advertise with us
  • Directory
  • Events
  • European Fund Selector
  • Newsletters
  • Follow us
    • Twitter
    • LinkedIn
    • Newsletters
  • Advertise with us
  • Directory
  • Events
    • Upcoming events
      event logo
      International Investment Nordic Forum 2021

      International Investment is delighted to announce the 2021 International Investment Nordic Forum which will take place on Tuesday March 9, at 9am (GMT). This curated virtual event will be broadcast live and will feature a series of fund manager interviews and presentations, as well as interviews with some of the Nordic regions top fund selectors.

      • Date: 09 Mar 2021
      • ONLINE, ONLINE
      View all events
  • European Fund Selector
International Investment
International Investment

Sponsored by

Sharing Alpha
  • Home
  • News
  • Products
  • Fintech
  • Regulation
  • ESG
  • Expats
  • In Depth
  • Special Reports
  • Video
  • Comment

Comment: Asset managers must address the tax-reclaim scandal

Comment: Asset managers must address the tax-reclaim scandal
  • Christopher Copper-Ind
  • 16 October 2018
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Send to  

Good stewardship on behalf of clients is taking centre-stage as a governing principle of the asset management industry. Increasingly, managers are being held to account for the extent to which they get the best results for their investors, writes Stanislas Conte.

Client expectations are rising all the time, and sooner or later, investors will turn their attention to what is little less than a scandal, the billions of euros being left on the table in terms of unclaimed cross-border tax, specifically Withholding Tax (WHT).

Related articles

  • Asset managers must address tax-reclaim scandal
  • European court ruling opens way for foreign fund claims in France
  • The unclaimed tax billions: a cross-border solution to a cross-border problem
  • The unclaimed tax billions: a cross-border solution to a cross-border problem

Many asset managers are unaware that they are failing to claim WHT, and those that are aware are uncertain as to how to go about the process. It is hard not to have some sympathy, given that the procedures can be tortuous and may become more so after Brexit takes the UK out of the orbit of the European Court of Justice (ECJ), which oversees the legal aspects.

But sympathy is unlikely to be sufficient once clients become aware of the scale of the problem.

Cross-border numbers
The numbers involved are quite staggering. According to BNY Mellon, the banking and financial services group, almost €5.47bn in cross-border tax entitlements is unclaimed every year. What this means is that unclaimed tax can be a larger drag on investment performance than the asset management fees about which so much has been written recently.

In 2017, the professional services firm EY, looking at open tax periods, calculated that there are potentially trillions of euro in dividend WHT for which refund claims have yet to be filed.

At issue is WHT charged on dividends and interest paid by securities domiciled in a specific country to an asset-management firm based outside that country. Put simply, WHT can be reclaimed in two ways, either through the provisions of a double-taxation treaty between the two countries concerned or through litigation. A Double Taxation Treaty is a contract signed by two countries to avoid territorial double taxation of the same income by the two countries.

Litigation arises when the treaty in question effectively discriminates against non-domestic investment vehicles in comparison with their domestic counterparts, charging WHT on the former that would not be levied on the latter. The ECJ has consistently backed litigants in this area, given that such discrimination breaches the principle of free movement of capital within the EU and cannot be permitted.

The best-known example of the court’s staunch defence of this principle was the so-called “Aberdeen case”, named after the win by the Scottish asset manager, but it is just one of many cases in which the ECJ has found for the litigant.

While litigation could sound hazardous and extremely expensive when the other party is a National Revenue Agency, it is not.

So far, apparently straightforward. Which raises the question of how and why so much WHT remains unclaimed.

On the face of it, an asset manager’s custodian should process such claims as a matter of course, although this is far from being the case on too many occasions. Banks frequently find the Double Taxation Treaties confusing and, as mentioned earlier, asset managers do not always pursue the matter, either because they are unaware of the existence of the rebates or because the process seems too involved and complicated.

Where blame lies
Not all of the blame lies with investment managers and their Custodians. Deadlines for claims vary across European states, as does the paperwork, some of which is overly-bureaucratic and difficult to understand. Some tax re-claim forms unilaterally impose additional conditions that can be onerous to meet.

Some examples will suffice. In Germany, it can be necessary to make contact with five separate tax offices, and the documentation has to be composed in German.

There are similar obstacles in Poland with, again, multiple tax offices involved and all documents in Polish.

In Spain, refunds are considered on a case-by-case basis, and, even when the ruling is favourable, it can take up to two years for the money to be paid.

The process in the Netherlands is very costly, complicated and time-consuming and frequently results in a negative decision.

Most egregious of all, perhaps, is the position in Italy, whose tax authorities have, until now, systematically rejected claims, in defiance of the ECJ.

In light of all this, asset managers are hardly to blame if, having calculated that the costs are likely to outweigh the benefits of reclaiming tax, they choose to forego their rights – or, more accurately, their clients’ rights. In an average fund, half of the WHT refunds that are due are not claimed, both because of these complex procedures and also because of a lack of information from the authorities concerned.

After all, tax officials are unlikely to broadcast all the various entitlements in this area, but the result of this opacity is that even many asset managers are unclear as to where they stand.

In the past, a partial solution to WHT problems was the securities lending, in which asset managers would lend their shares to a borrower. When the shares distribute dividends, the borrower would then pay the lender the dividend net of WHT, ensuring the lender was not out of pocket, plus an additional sum for the loan; the total income for the asset managers would be close, but not the same, as the equivalent of cashing the dividend gross of WHT.

This door has been closing for some time, as one jurisdiction after another, the last, notably, Germany for German stocks, has ceased to allow it. At the same time, securities lending activity, even if the loans are fully collateralised in case the borrower defaults during the loan, still adds some risk for the underlying investors.

Paying upfront
When WHT reclaim processes promise to become arduous and complicated, they should probably be undertaken only by specialists in the field. Some charge an up-front fee and a success fee. For asset managers, the initial fee, which can be high, may be problematic, especially when claiming smaller amounts.

Indeed, this charging model may deter them from claiming what is due.

Other specialists levy no up-front costs and charge only a success fee.

At the start of this article, we mentioned the “stewardship” that is now expected of by asset managers, management companies and funds’ directors. To many, this seems to translate as voting at the annual shareholders’ meetings of the companies in which they invest and taking an active interest in how those companies conduct themselves.

These are important aspects of stewardship, but we would argue that a good steward also seeks to avoid waste in terms of funds properly belonging to their investors. In addition, the market is offering a broad range of solutions and providers for any asset managers, including the smaller ones, eliminating any alibi not to act.

They need to prepare now, as the time is drawing near when clients will, as a matter of course, expect managers to treat tax reclaim as a key operational activity.

Understandably so, as all these and trillions are, ultimately, the property of the asset managers’ clients.

  • Tweet  
  • Facebook  
  • LinkedIn  
  • Send to  
  • Topics
  • Comment
  • Asset management
  • BNY Mellon
  • Comment

More on Comment

Comment: Can equities tolerate higher bond yields?

  • Comment
  • 26 February 2021
Comment: Four key issues powering the renewable energy revolution

  • Comment
  • 22 February 2021
Comment: What's behind the rapid rise of social bonds

  • Comment
  • 19 February 2021
Comment: The pandemic has dramatically complicated issues of tax residency

  • Comment
  • 15 February 2021
Comment: Why the future is looking bright for the UAE

  • Comment
  • 12 February 2021
Back to Top

Most read

EU removes Barbados from blacklist of 'non-cooperative' jurisdictions
EU removes Barbados from blacklist of 'non-cooperative' jurisdictions
Global UHNWI population to grow by 27% over the next five years: Knight Frank
Global UHNWI population to grow by 27% over the next five years: Knight Frank
J.P. Morgan Asset Management launches Global Income Sustainable Fund
J.P. Morgan Asset Management launches Global Income Sustainable Fund
Comment: Four key issues powering the renewable energy revolution
Comment: Four key issues powering the renewable energy revolution
Amati Global Investors launches strategic metals fund
Amati Global Investors launches strategic metals fund
  • Contact Us
  • Marketing solutions
  • About Incisive Media
  • Terms and conditions
  • Policies
  • Careers
  • Twitter
  • LinkedIn
  • Newsletters

© Incisive Business Media (IP) Limited, Published by Incisive Business Media Limited, New London House, 172 Drury Lane, London WC2B 5QR, registered in England and Wales with company registration numbers 09177174 & 09178013

Digital publisher of the year
Digital publisher of the year 2010, 2013, 2016 & 2017
Loading