UK Investors Fail To Reclaim 90% Of Taxes On Foreign Dividends

by Amanda Banks, Tax-News.com, London

20 October 2005

A new report from tax reclamation specialist GOAL has revealed that over a quarter of a billion pounds (GBP251 million) of UK investors’ returns are being lost to foreign tax authorities in unreclaimed witholding tax paid on stocks held abroad.

Private investors are failing to recover an amazing 90% of reclaimable tax, incurring losses in earnings to the tune of 13-14% of overall dividend returns. This comes at a time when dividends have become a critical element of investor returns.

Dividends on foreign shares are typically taxed twice - once in the country where the asset is registered and once in the country of the owner of the asset. Double Taxation Agreements between governments allow some of that tax to be reclaimed. They even give a period, often years, over which that tax can be successfully reclaimed. If, however, an investor fails to make a reclaim or fill in the proper form correctly within the time frame, then the rule is simple, says GOAL: the foreign Government keeps the cash.

The firm says that in the past, the subject of withholding tax reclamation has often been swept under the carpet because private investors and their financial advisors (IFAs, stockbrokers, accountants, private banks, etc) have had no reliable data sources indicating the true scale of losses being incurred. The process of making a reclaim is laborious, and requires an in-depth knowledge of different tax regimes and reclaim formats across many different geographies and legislatures. Financial advisors would find it impossible to deliver a return on investment for assuming this plethora of knowledge and detail. However, for institutional investors, the sums do add up, because the amounts available for reclaim are far higher. GOAL’s research in 2003 showed that 73% of reclaimable tax was being successfully retrieved by custodian banks on behalf of their clients.

The situation could be about to change, though, says GOAL. The processes and systems developed for the fund manager/custodian bank marketplace are now being scaled down to come within the reach of private individuals and their financial advisors. The knowledge-base used to process claims, automatically generate the right forms, and ensure that they are filled in correctly, are just the same for private individuals as for investment funds and their underlying investor clients. It is likely that the growing importance of the dividend as an element of investor returns will lead to an appreciable rise in the awareness of the impact of effective tax reclamation on foreign securities earnings.

Stephen Everard, Managing Director, GOAL, comments: “Our research has brought the surprisingly undocumented topic of tax reclamation to light. It is shocking that 90% of reclaimable tax is being lost unnecessarily by private investors. It represents a huge opportunity for financial advisors, stockbrokers and accountants to manage the reclaim process for their clients, in order to provide an additional client service, and to improve the financial return their clients are obtaining on their equity portfolios. New advancements in technology and processes more suited to private investors are being developed, however, and many would be well advised to take advantage of these to recover their overwithheld tax - which, after all, is rightfully theirs.”

Global Operations and Administration Ltd (GOAL) was established in 1989, and is a privately owned software and outsource service 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) – available as installed software or as an outsource service - 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 covers the entire spectrum of financial institutions ranging from custodians, fund managers, private banks, hedge funds and high net-worth individuals.

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