Industry experts from Goal Group, EY, BBH and ICI discuss the current challenges in the withholding tax reclaims space, the biggest pain points the industry faces, and crypto’s place among these considerations
Vicky Dean
Managing director, EMEA global head of client services
Goal Group
Sarah Belin-Zerbib
Managing director – international tax and transaction services
Ernst & Young LLP (EY)
Danielle Clark
International tax wealth and asset management leader
Ernst & Young LLP (EY)
Katie Sunderland
Assistant general counsel, tax law
Investment Company Institute
Dawn Schaefer
Vice president, global tax services
Brown Brothers Harriman & Co.
What are the biggest challenges facing the world of withholding tax reclaims?
Vicky Dean: Withholding tax (WHT) reclaims are a fickle beast, continuing to change and evolve continually. Throughout the year, forms, rates, processes and rules change, often at short notice, and it is incredibly difficult to keep up. Due to this being a low priority in many organisations, the reclaims are often grouped together and submitted close to becoming statute barred.
With recent changes coming into effect, this means that reclaims are sometimes rejected and then you are running up against the clock to rectify issues and resubmit before the money is lost. Keeping up-to-date with the changes is vital but also difficult. Unless you are a small or medium-sized enterprise (SME) or have existing relationships with key sources, they can be incredibly hard to find and understand. While these challenges are not likely to ever go away, vendors such as Goal Group (Goal) can ease the burden of this and provide solutions to match client needs at a compelling and flexible price point.
Dawn Schaefer: The biggest challenge is getting your money back. The tax reclaim process is not always straightforward. Twists and turns can occur along the way before a successful payment. It is not as simple as filing a form with beneficial owner information and income details and receiving a payment within six months. Forms, reclaim requirements and documentary evidence supporting eligibility have become more complex, and even a perfect tax reclaim filing may still prompt further questions from tax authorities — starting the process all over again.
Tax authorities have evolved with the times, and their efforts to mitigate tax avoidance and ensure proper entitlement create a significantly more burdensome administrative environment when compared to the ‘address rule’ approach of the past. In addition, there is no one-size-fits-all tax reclaim process, and there are more than 40 markets in which tax reclamation opportunities exist.
To be successful, you need to know all the rules in each jurisdiction, inside and out, and have the proper checks and balances in place. For service providers, client awareness and active cooperation is critical, as the statute of limitations can tick by very fast. On the flipside, proper upfront preparation and due diligence from client to global custodian to sub-custodian can streamline this process and make it more effective.
Sarah Belin-Zerbib: As the foreign WHT space becomes increasingly complex and nuanced, tax authorities, financial intermediaries and global investors are still in search of a solution to streamline the reclaim process. Despite increased awareness of the need to enhance the process, it is currently still a very cumbersome, generally paper-based process and remains characterised by a lack of standardisation.
Certain key notions like beneficial ownership and tax residency still vary from one country to another, which creates major obstacles in determining tax-relief entitlement for certain institutional investors.
The number of financial intermediaries involved in the chain of payment, as well as the way custody accounts are structured (notably omnibus accounts), exacerbates this very manual process further.
From a global tax policy perspective, certain initiatives such as the base erosion and profit shifting (BEPS) Multilateral Instrument (MLI) make foreign WHT reclaims even more complex. For those countries that have signed the MLI, the treaty-based recommendations from the BEPS package can be implemented swiftly. The BEPS package provides 15 Actions that equip governments with the domestic and international instruments needed to tackle tax avoidance. It represents one of the most important changes to cross-border tax norms in history.
The deployment of Treaty Relief and Compliance Enhancement (TRACE) regimes across the world was expected to result in a standardised tax withholding system facilitated by authorised intermediaries. Its implementation in Finland in 2021 has considerably increased the due diligence and related liabilities of custodian banks and the documentation burden of their clients.
Katie Sunderland: The biggest challenges to reclaiming WHT include procedural inefficiencies, such as paper and original ‘wet signature’ filing requirements, frequent changes and uncertainty regarding legal and process requirements for receiving treaty relief, and lack of consistency across markets. These challenges are compounded by the sheer volume of transactions that must be processed.
Delays in recovering relief, to which funds are entitled, can negatively impact investor returns. Fortunately, there is momentum for change. The increased automation of local markets, which could make the biggest difference, is gaining attention. Denmark and Germany, for example, have implemented reclaim processes that are largely electronic. Even in those generally developed markets, the processes of which are well understood, processing times can be substantial; while the average is about 18 months, in some markets it is 36 months or more. Moving towards ‘quick refunds’ or ‘relief-at-source’, as some markets already are, would benefit fund investors greatly.
Uncertainty regarding treaty eligibility and processing requirements can delay recoveries significantly. These issues are most pronounced when there is not a well-defined process for recouping treaty-entitled amounts. Difficulties also arise when there are no clear rules or processes for specific investment vehicle types. Tracking relief, with correct tax rates applied, is an involved process. The task is even more daunting due to the volume of claims and instances in which the incorrect rate has been applied and must be challenged. Success may depend on engaging a third-party service provider to assist. These additional delays, and associated costs, harm fund investors.
Different requirements in different markets also create challenges. Bringing more consistency across markets has long been an industry priority. The Organisation for Economic Co-operation and Development (OECD) developed the TRACE packageover a decade ago, and the European Commission is currently developing a quick refund process for potential adoption across the European Union.
What are the biggest pain points associated with this process?
Schaefer: The biggest pain point is that it is primarily paper-driven. This raises the risks and the need for expert support and control. Although electronic mechanisms to file have emerged, most tax reclaim forms must still be signed in ink, and either stamped or accompanied by original certificates of residency from investors’ local tax authority.
Tax inspectors are still physically opening envelopes and reviewing tax reclaim applications and supporting documentation for completeness and accuracy. In the case of US residents, the Internal Revenue Service’s certificate of residence process is still paper-driven, and over the last few years the COVID-19 pandemic has impacted the government’s fulfillment capabilities.
Sunderland: The biggest pain points are finding talented people to perform specialised roles and ensuring that all documents required for filing are available.
The requirements for receiving treaty relief can be complex — both procedurally and substantively. Individuals working in this area must have specialised knowledge, demonstrate careful attention to detail and be prepared to solve problems quickly. Even the slightest issue can lead to significant delays and potential lost relief.
Fund tax managers need assistance from others to file for treaty relief. Unfortunately, managers often find themselves at the mercy of someone else’s timeline before they can proceed — regardless of the efficiencies and diligence built into their own processes. These impediments have downstream effects ranging from delayed account openings to excess tax withholding, which again, may prove difficult or impossible to reclaim.
The IRS, for example, may not yet have provided required certificates of tax residence (CoRs) or may have prepared them inaccurately, preventing timely filings. The digitalisation of these processes would allow for more accurate and faster processing times and, ideally, at-source WHT relief when available. Digital investor self-declaration forms, in lieu of certificates of tax residency, would also provide much needed consistency and expediency in reclaim filings.
Documentation issues also arise when local markets change their tax rules and requirements — particularly when associated implementation challenges have not been addressed. Clear guidance is needed to resolve a myriad of interpretive questions.
Danielle Clark: While global custodians offer a variety of foreign WHT related services, they essentially act as facilitators in the treaty relief process and rely on information and self-certifications provided by their clients regarding treaty entitlement position and profile.
This leaves a substantial burden on global investors that may not have the resources and in-house technical expertise to properly address these questions. In an increasingly complex and fast-moving tax landscape, what used to be the completion of tax forms with basic key information has become an obstacle course for many global investors.
In certain contexts, such as securities held through brokerage relationships, tax relief services may not be offered (or only minimally offered) by financial intermediaries. In those cases, global investors must take full ownership of the process and hire tax experts to assist them. Indirect holding of securities through various intermediate structures, including partnerships, is also a factor increasing complexities in recovering these taxes.
Where securities are held directly through a global custodian, certain markets may not be serviced for reclaims. In countries such as Italy, Indonesia, Russia and South Korea, providing an incomplete or erroneously completed relief-at-source form may result in permanent financial losses, as it is difficult to obtain a refund of overwithheld tax when relief-at-source is missed. Even when reclaim services are offered, incidents like this are harmful from a liquidity perspective.
Overall, lack of oversight can result in accumulated issues and consequential financial losses. Over the past several years, Ernst & Young (EY) has observed an increased awareness among institutional investors of the benefits associated with improving their oversight. As a result, they have developed best practices with support from their tax advisors.
Dean: The world of WHT reclaims is a minefield! The rates, the forms, the processes, the submission requirements, the language barriers and the millions of permutations mean that WHT reclaims are often outsourced, pushed to the bottom of internal priorities, or ignored altogether.
As with many niche areas in financial services, it is difficult to find people who are SMEs in this field, and even when you do find those people, managing the processes can be daunting, time consuming, complex and labourious. Our technology has been deliberately designed to remove these barriers and create a seamless end-to-end process, allowing financial institutions the power to perform these services without spending infinite amounts of money trying to do it themselves, which often results in an elevated headcount.
How do you manage the continuous changes to treaties, forms, and specific market requirements?
Sunderland: Third-party tax service providers, including global custodians, assist by compiling and communicating changes to treaties and specific market requirements such as forms. Most providers have expansive networks that provide up-to-date and accessible information. These third parties also assist clients to implement changes in firms’ processes, enabling the industry to keep on top of local market changes with minimal interruption to process flow. Industry associations and industry peer networks can also prove invaluable. Both provide additional ways to stay abreast of changes and offer practical perspectives on implementing them.
Dean: At Goal, through our dedicated global research department, we have partnerships with many industry specialists who we rely on to provide information which is essential to ensure the data we maintain in our applications is current and complete. Given variables, it is imperative that we use a variety of sources and leverage our excellent relationships with the tax authorities, globally. By engaging these sources and compiling the information in our Global Tax Reclamation Solutions and tax and revenue management applications, our clients have all the information they need at their fingertips. Goal is responsible for managing this information in the background so that our clients only need to import data — all the hard work is done for them.
Belin-Zerbib: Our firm has worked with global investors and their custodians on foreign WHT matters for more than 30 years and has supported them with meeting the challenges faced in this industry. Specifically, EY’s Global Withholding Tax Reporter (GWTR) has been the authoritative online tax reference tool for current and historical WHT information, including reclaim and relief-at-source forms and instructions related to portfolio investments. More than 100 foreign EY member firms currently contribute to our GWTR services. Our team is also supported by specialists focused on tax controversy, international tax and BEPS, including the EY Global Tax Desk Network, for real-time assistance. Our global investor clients are also seeking more support with the identification of over-withheld taxes and the filing of reclaims in countries not serviced by their custodians or brokers. More recently, they have been requesting assistance with the tracking, monitoring and completion of relief-at-source and reclaim tax forms filed through their custodians.
Schaefer: I always tell new employees: “there are no two days alike in the tax world.” Changes occur every day, and impacts can arise from governments’ announcements of new laws or budgets, tax authorities’ changes to administrative or procedural requirements, issuers’, paying agents’, depositories’ and sub-custodians’ changes in practice or process.
It can seem like information can originate from just about anywhere! This information then needs to be physically read by a tax analyst and catalogued. Thereafter, steps need to be taken once the impact is determined. The impacts of changes include communication to clients, custody and fund accounting systems updates, and tax documentation changes.
In the perfect scenario, this information could be read by artificial intelligence (AI) software and automatically routed into a workflow system based upon key words, but subject matter expertise is still required to properly track, analyse, coordinate, and implement it. In addition, the words ‘tax’ and ‘risk’ are used together a lot these days. Units managing tax-related matters are keenly aware of the risk and legal implications of what looks like an administrative process. This should not be underestimated.
What is the biggest asset within the WHT reclaim space? People, technology, or both? What are you seeing?
Schaefer: People and technology are equally important in this space. Technology is essential to manage the intricate tax withholding rules, tax reclaim form completion, overall status tracking and payment aspects.
There is no one-size-fits-all solution, and each market or tax authority has their own requirements. As a global custodian, having a competent team of subject matter experts who can implement rules that vary by market, instrument and residency (or entity type) into the system are critical, as is the ability to effect systematic change in real time. There is still a significant reliance on subject matter experts to maintain this massive data warehouse of rules and exceptions.
In addition, as a global custodian BBH manages clients’ supporting tax documentation, which is required to accompany tax reclaim applications. Therefore, we must be able to present requirements to clients to receive tax documentation back in a timely manner.
A technological workflow system is a must, but the subject matter experts who move ‘paper’ through the process and provide transparency to clients every step of the way are also critical.
Sunderland: People and technology are both big assets. Technology — internal- and external-facing — is essential for working with service providers and addressing local market requirements. Human capital, of course, is needed to support the interpretation, assimilation and implementation of that information into firms’ processes.
Dean: Both. Automation and technology are leading the way, we are seeing replacement of legacy infrastructure, moves to cloud-based technologies, advanced levels of automation, and reliance on key information and accessibility through applications. A lot of this has been driven by the COVID-19 pandemic, with organisations needing to look deeply into their setup and how it can work to support their clients and provide business as usual at a distance.
It is incredibly important to focus on the people working alongside technology in order to advance in any line of business — particularly when it comes to financial services, it is a necessity to provide as much support and automation as possible. It is also key to focus on people and their relationships with your clients. Having the best of both worlds allows clients to find levels of support they may not have with AI.
Clark: A combination of both, without question. The first step to take, from a global investor perspective, is to build a more robust oversight of foreign WHT positions, starting with more access to information, as well as better data management solutions. For instance, the management of custodian requests for tax relief documentation, or forms via email, presents some challenges in terms of prioritisation and proper monitoring of outstanding items.
Solutions to address these challenges involve ‘triaging’ foreign WHT forms requests, identifying missteps, measuring consequences and remediating. Building workflows, trackers and dashboards has increasingly become part of the best practices implemented by our clients in this area. Combining in-house, dedicated resources with the services of a trusted tax advisor is also essential to navigating a constantly-changing tax landscape.
From a broader perspective, building a global technology-based solution, to which all parties involved have access, appears to be the only sustainable pathway to enhance the tax relief process and decrease the current pressure on resources. Technology can streamline and secure the documentation of treaty entitlement, and support the various reconciliation processes and the proper identification of the beneficial owner. If anything, the COVID-19 pandemic has shown the limits of this very paper-based and manual-oriented process. Adopting a digitalised environment is an imperative that still needs to find its means. New technology solutions, notably distributed ledger technology (DLT), have the capacity to answer a number of fundamental WHT claim questions. Deployment of such solutions requires the collaboration of all the involved actors: investors, financial intermediaries and governments.
Do you believe crypto assets will be affected by WHT in the future as the two areas become more regulated? If so, how?
Belin-Zerbib: In a recent article, EY noted that global investment in digital assets has increased significantly in the past 13 years. Blockchain-powered products bypass conventional intermediaries, accelerating transaction times, reducing costs and making innovation possible. Decentralised digital assets, however, have raised new challenges for tax authorities while increasing tax risk for service providers and their customers.
The digital assets industry continues to evolve at great speed, generating a high level of tax ambiguity. Digital assets service providers’ mandated role may be relatively light at the moment, but that lack of accountability is likely to be short-lived. This will come as no surprise but, so far, the solutions that local governments are either implementing or contemplating are contradictory — this will undoubtedly create many challenges in the future.
Crypto assets may be affected by withholding taxes. We are expecting the trend towards contrasted regulations to continue along with the corresponding burden this will mean for global investors and financial intermediaries.
Dean: Over the last year, we have seen lots of noise surrounding the regulation and tracking of crypto assets, and once this has been established, and they become more transparent and accessible, we believe that there may be implications in relation to WHT.
Currently, crypto assets are only normally taxed upon sale, but if they become regulated and transparent, we would expect them to be treated the same way as any other cross-border investment and WHT-deducted based on market requirements. If they follow the same pattern as other cross-border securities, then hopefully this will mean that a portion of the tax withheld can be reclaimed depending on the security type, market of investment and domicile of the investor. Given that the current discussions have involved authorities providing guidance on what taxes they are expected to pay, it may be a while until we see these guidelines rolled down to withholding taxes.
Schaefer: It is reasonable to expect that crypto assets will be more broadly subject to taxation in the future. We have been watching developments in this space, including the contemplation of reporting requirements that enable governments to have sight of gains relating to the sale of crypto assets. The nature of crypto exchanges may result in a completely different set of responsible parties or operating structure to withhold tax ‘at source’ – as the question will be what each government considers the ‘source’.
Sunderland: The impact that withholding taxes will have on digital assets is yet to be determined. Clearly, digital assets are growing in importance for investors and regulators. However, their tax treatment varies among countries, even those with clear rules.
Some clarification regarding tax reporting of transactions involving these assets is provided by the OECD’s Crypto-Asset Reporting Framework (CARF). While the timeframe for CARF implementation has not been announced, it is expected to take a few years. The extent to which withholding will be applied to digital assets may depend, in part, on the effectiveness of tax reporting.
What do you see in the future of WHT reclaims?
Dean: There has been talk for many years of markets, particularly in Europe, standardising the reclaim procedure. However, to this day, we still see different markets introducing different rules, rates and submission requirements. While we are still a long way from this happening, we are seeing tax authorities revisit their processes and modernise the way in which these reclaims are handled.
We are often asked to be part of the discussion when it comes to the future of tax reclaims and would hope to provide further insight by engaging with thought leadership and whitepapers, both independently and as part of some of our high-profile industry working groups.
One of the big changes we want to see is the education of the investment community; helping them understand that this is something they are entitled to. While not widely publicised, or explained, we want to break that taboo and use our network to increase awareness and provide options to ensure that these services are being carried out and the financial services community are fulfilling their fiduciary duty.
Schaefer: As a global custodian, we advocate for technological advancement, standardisation and efficiency in market practice, process and operating model evolution. Technology is a key factor, as straight-through processing is needed to enable global custodians to file thousands of tax reclaims and electronic transmission from generation to final payment.
In this case, one could define ‘nirvana’ as the elimination of any need to file reclaims in deference to an efficient, effective, global reduction-at-source model. While such a global nirvana may be elusive, we will continue to engage with industry bodies to advocate for optimal solutions.
Sunderland: Evolution takes time. The good news is that there is momentum at the OECD, in the European Union, and in some local markets to improve cross-border investing; this momentum includes simplifying the process by which funds receive treaty relief, while enhancing tax compliance. These improvements may include the adoption of a digital investor self-declaration that can be used in multiple markets, and quick refunds, or at-source relief, for low-risk claimants or transactions. Improvements could also include streamlined and efficient automatic exchanges of information that would provide greater comfort to tax authorities.
Clark: To address the many challenges of the reclaim process, the future we envision revolves around a set of technology solutions facilitating immediate and secure access to information on both ends of the tax relief process, while supporting the various reconciliation processes involved in the granting of foreign WHT relief.
To be viable, such technology-based solutions will need to meet the needs of all the key players in the process, from local tax authorities to global investors and financial intermediaries. This change will only happen if local governments agree to regulatory changes, acknowledging secure digitalised documentation and certificates as a valid replacement for archaic paper documentation. Global organisations have a crucial role to play in convincing their governments that change is now long overdue.
