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The scale of the problem is likely to surprise fund managers, who are already struggling to eke returns out of difficult market conditions. The fund managers themselves are not legally able to claim tax rebates directly – it is the responsibility of custodian banks to approach the tax authorities and request the money.
But a combination of clumsy bureaucracy on the part of tax authorities and a lack of awareness on the part of fund managers has resulted in low rates of recovery.
The report that puts a figure on the scale of this problem was published in November by Goal, a software company that provides solutions to custodians for providing reclamation services.
The company compiled the figures based on information from exchanges, data providers, ratings agencies and industry associations. It found that annually just over $24 billion in reclaimable tax is withheld on cross-border securities dividends and income. So managers and investors are failing to receive 25% of what they are due.
Demanding what is theirs
But as beleaguered fund managers refocus on dividend payments rather than on the inflated prices of the stock market bubble, they are increasingly determined to receive what is theirs, and they are putting pressure on custodians to produce better rates of recovery and to be more transparent about their rates of success.
Wendy Cohen, a director at Goal, says: “We are getting enquiries from fund managers who are saying that they want to be able to measure custodians’ performance. They are asking us to provide software so they can see what they should be getting back.” Some managers are even making tax reclaims a core competency when assessing their custodians, and they are including it in requests for proposals.
The poor success rates in recovery are not entirely the fault of custodians – there are also bureaucratic obstacles. In France, for example, withholding tax reclaims can be done only by a French custodian. In Germany, applications have to be stamped to certify that the form has been completed by a German resident.
Most tax authorities still demand paper documentation. A few continental European countries have started to use technology to speed up the process. These include Switzerland, where the tax authorities use bar codes to match custodians and documents, and Germany and the Netherlands, which will use electronic applications soon.
Nonetheless, custodian banks, which are also hungry for new sources of income, are grasping the opportunity to make more income from boosting their tax services. They are starting to see the dry process of tax reclaims as a new source of income and to market themselves partly on the basis of this service. The Goal report estimates that globally, custodians stand to make $483 million of income from this process.
Recovery rates are likely to improve in the 12 months leading up to the next Goal report, partly because of the pressure from fund managers and partly because custodians are eager to see new funds under management and new fees. Some custodians make these extra fees on commission – depending on how much they recover for the client. Others build this service into their overall management fee. Fund managers should be careful that they are not paying too much – after all, it is their money.
