What major challenges do firms face regarding tax recovery today, and how has the market changed over the last 10 years?
The tax landscape is always in flux. We are seeing the introduction of MiKaDiv, the EU’s Faster and Safer Relief of Excess Withholding Taxes (FASTER) Directive, and other initiatives designed to manage some of the challenges within the withholding tax landscape.
FASTER, for example, was initiated to streamline and create a more seamless withholding tax recovery process within the EU.
The intention is to make the process simpler, but the result will introduce considerable complexity and challenges that even large, reputable institutions will have difficulty navigating.
Even before these developments, firms were dealing with a very onerous process. Tax authorities have specific filing requirements and there is a tremendous amount of red tape and bureaucracy.
Global investors also have exposure to multiple markets, meaning firms must deal with different tax authorities, each with their own processes, and information requirements.
There are also language barriers, terminology that may be unfamiliar outside a particular jurisdiction, as well as significant challenges when communicating with tax offices.
Supporting documentation creates another challenge because firms do not necessarily have access to everything that is required. When you put all of those factors together, the process was already significantly challenging to navigate and, with initiatives such as MiKaDiv and FASTER, it is becoming even more complex.
How are global regulatory and tax policy developments affecting the tax recovery landscape?
They are making it much more onerous and introducing additional complexity. I think the result is a dynamic where many participants within the value chain recognise that this is not part of their primary skill set or core service offering.
A firm might be an expert in custody or brokerage, for example, but increasingly recognise the need to partner with specialists in tax recovery. The more complex the landscape becomes, the greater the need to engage with experts.
You are dealing with many different jurisdictions, complex administrative procedures, specific filing requirements, and supporting documentation requests.
On top of that, you have to manage the process of following up with the tax authority. It is not as simple as preparing a claim and submitting it. You may have to manage queries and requests for additional information, and continue following up afterwards.
We are exclusively focused on withholding tax recovery. We do not offer other services such as class action recovery because we believe that, in order to be the best at withholding tax recovery, it has to be our exclusive focus.
How do you balance compliance rigour with the pressure for faster reclaim turnaround times?
Compliance is non-negotiable. We have strong relationships with the major tax authorities and, ultimately, they are the gatekeepers. We work within very strict requirements in terms of what is needed for a claim.
At the same time, speed of recovery is a very important part of our process. We are extremely focused on the time value of money.
Our clients can be owed considerable sums and tax authorities have large volumes of claims to manage and assess on an ongoing basis, so the process can already take a long time.
We therefore make sure recoverable opportunities are actioned immediately. As soon as a dividend is paid and we have a corporate action recorded, we flag it with the client and begin sourcing the data and supporting documentation so the claim can enter the system as quickly as possible.
There can otherwise be an unnecessary delay between the corporate action, notifying the client, receiving the data, attending to the filing requirements, and sourcing supporting documentation. We want to get that process moving from the outset.
Compliance does not have to come at the expense of speed. It creates requirements that we have to meet, but we can still ensure the process begins immediately.
What separates firms that perform successfully in global tax recovery from those that underperform?
Even if you assume that firms ultimately achieve the recovery, there are still significant differentiators. One of the biggest questions is: at what cost?
A client might be given a fee, but there can also be less obvious costs that are not necessarily expressed explicitly by the service provider. Transparency around costs and overall cost effectiveness is therefore very important.
There is also the question of how quickly the money is recovered and whether the client can see where a claim is in the process.
Is there transparency around the time taken to recover the money, as well as the cost?
Customer experience is another important differentiator. You do not want to keep going back to the customer for the same information because there has been staff turnover on the service provider’s side.
We are fortunate to have exceptionally low staff turnover, which means people are not dropping the ball or repeatedly requesting information that should already be available.
Speed is also extremely important. I am not suggesting that any provider receives preferential treatment from a tax authority; the differentiator is how quickly you submit the claim in the first place.
If the client does not know when that submission happens, there may not always be sufficient urgency on the service provider’s side to get it into the tax authority’s system as quickly as possible.
Ultimately, we are dealing with financial institutions and their clients’ money. It is easy to think about a recovery at fund level, but it is really about the underlying unit holders and individuals within that fund.
There is a fiduciary responsibility attached to that, which makes transparency around costs and recovery times critical.
We also make commitments to our clients around cost effectiveness and are happy to be challenged on that basis. Although providers may all be recovering withholding tax, the devil is in the details.
What do you think are the biggest operational pain points that clients face when managing foreign withholding tax recovery internally?
Resources are a major issue. The process is onerous in terms of the amount of time it takes and highly specific to individual jurisdictions, so experience is extremely important.
A firm might have the required skill set, but not necessarily the experience needed to manage the process effectively.
There are numerous factors that have to be considered when making a recovery, including the shareholder structure and status, permanent establishment, status and year of the income, statute of limitations, where the investment is held, the type of market, filing and data reporting requirements, statutory oversight, processes, and the duration of claim processing.
Viewed individually, those factors might not appear insurmountable. The complexity comes from the way they interact and depend upon one another, with every jurisdiction bringing its own requirements.
That is before you consider sourcing supporting documentation, which can itself be very challenging. In some jurisdictions, the requested documentation may not readily exist, while documents must also contain the specific disclosures required by that particular tax authority. Additionally, you need to obtain a certificate of residence from the relevant tax authority.
When all of these requirements are combined, the process can become extremely difficult to manage, even for a single jurisdiction, let alone across all of the markets to which a global investor has exposure.
Is withholding tax recovery now a strategic conversation within asset servicing rather than just an operational one?
Absolutely. I think the essence of withholding tax recovery can be described as ‘operational alpha’. It is alpha sitting within the operational function.
It is important to understand withholding tax recovery for what it really is. Consider a situation where a tax authority charges a beneficial owner or shareholder more than they should because of an initial assumption that the person is locally resident.
Once it is established that the person is not locally resident and is therefore entitled to preferential treatment through a double taxation treaty, the differential is actually not tax, but a dividend.
That might sound like semantics, but it is an important distinction because it gets to the crux of what we are doing. It is a return on investment that was initially incorrectly classified as tax based on a false assumption. Once that assumption is corrected, it is treated as it should have been initially: a dividend and a return on the investment.
This is why we do not see withholding tax recovery as simply a tax function. It is an operational function and an opportunity sitting within the operational process that needs to be addressed. The resulting recovery can then be added to investment returns, or alpha, which can be a critical differentiator between asset managers.
How do you think asset owners’ expectations are changing when it comes to transparency and tax reclaim reporting?
Over the past several years, we have seen greater awareness among asset owners. There are still conversations where people do not fully understand that they are entitled to money that is being left on the table, but years of education have helped more people recognise that withholding tax recovery is an important source of alpha.
The differential between the performance of asset managers and funds can be increasingly small, so any additional alpha or return on investment becomes important. Withholding tax recovery is therefore moving away from being something that is useful if you get it, but not a problem if you do not. It is becoming an essential part of remaining competitive in a very competitive market.
Where do you see the greatest opportunities and challenges for the tax recovery industry over the next 5 to 10 years?
FASTER will be one of the most significant developments. For many years its implementation seemed a long way off, but it is now becoming increasingly imminent and firms need to prepare for it. It is going to create considerable complexity for custodians and other intermediaries, and I see that as the most significant challenge within the withholding tax recovery landscape going forward.
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Prescient Fund Services in Ireland
Nicola Gerety
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Image: Global Tax Recovery 
