$6bn Withholding Tax Goes Unreclaimed, Says GOAL

Tax-News.com, London

25 November 2002

A new report from GOAL, a firm which specialises in helping taxpayers to reclaim withholding tax, says that over $6 billion worth of investors funds are being lost annually in unreclaimed withholding tax on cross-border securities holdings. In a time of tightening asset returns, says the report, this situation has become of great concern to investors and their fund managers, who are now demanding more effective tax reclamation services from their custodian banks. The report also reveals that leading custodians who are using automation to deliver profitable reclamation services can access a global earnings market worth almost $½ billion.

Findings from the report include:

• 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 income market from tax reclamation services of $483 million across the globe;
• In major markets, an average of almost 8% of investors’ returns from cross-border securities dividends/income are reclaimable;
• The report estimates that only 73% of over-withheld tax is actually reclaimed from foreign tax authorities each year, leaving over $6 billion dollars unreclaimed in the last year.

The report says that fund managers are now actively seeking automated methods of predicting investor portfolio returns, taking into account the effect of withholding tax reclamation cash flows.

Wendy Cohen, Director of Sales and Marketing at GOAL, comments, “The subject of withholding tax reclamation is often swept under the carpet because investors, their fund managers and custodian banks have no reliable data sources which indicated the true scale of losses being incurred. As returns from capital growth have largely disappeared from the equities market, there has been an aggressive focus on dividend income and a move in portfolio balances towards fixed-income investments.

“Our first annual report on the withholding tax reclamation market provides investors and their service providers with benchmark metrics on withholding tax reclamation, so that they can manage their cross-border investments more efficiently. In this atmosphere, leading custodians have recognised the market opening represented by effective tax reclamation services, both for their FM 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 appear to be declining.”

Global Operations and Administration Ltd (GOAL) is a privately owned software company developing and delivering business critical tax solutions to global financial institutions. GOAL’s solutions automate the complex, labour intensive processes based on the interpretation of international cross-border treaty law. GOAL’s flagship product GTRS (Global Tax Reclamation System) helps custodians reclaim tax on income from cross-border securities that has been overwithheld by foreign governments based on international Double Taxation treaties. The company’s client base includes 5 of the world’s top 10 global custodian banks.

The reclamation of withholding tax is without doubt one of the most difficult tasks facing tax planners, and it comes as no surprise that a high proportion of reclaimable withholding taxes go unreclaimed. But the calculation of what is 'reclaimable' is more of an art than a science, since it depends on assumptions about the tax status of investors, many of whom have no desire to reveal the information needed to underpin a claim for repayment, and may prefer to forego 5% or 10% of their income rather than having to expose the underlying reality of their affairs.

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