Investor confidence in equity markets is increasing, with some arguing: “If 2013 was the year of returning hope, 2014 is set to be the year of returning growth opportunities.” Since the financial markets crisis, equities have certainly recovered strongly and in November 2013 the total value of equities in the 58 major stock markets reached $63.4 trillion, higher than it has ever been.
Investor confidence in equity markets is increasing, with some arguing: “If 2013 was the year of returning hope, 2014 is set to be the year of returning growth opportunities.” Since the financial markets crisis, equities have certainly recovered strongly and in November 2013 the total value of equities in the 58 major stock markets reached $63.4 trillion, higher than it has ever been.
Moreover, it is not just equities that are back in fashion. Interest in cross-border investing is also on the rise. According to statistics from the International Monetary Fund and from global stock exchanges, the market capitalisation of global equities rose 81 percent between 2003 and 2012, and the value of cross-border equities investments rose 141 percent over the same period.
As a result of these increases, more and more companies are now paying a dividend, with those that have historically done so also looking to increase their dividend payouts year-on-year. Fund managers are also steadily increasing the proportion of their portfolio made up of foreign shares, with the average proportion of a portfolio held in foreign shares tallying up to 24.9 percent in 2003, and rising to 33.1 percent in 2012.
In all events, dividends on cross-border shares and yield from foreign bonds are subject to withholding tax. This is a tax on earnings that a country’s tax office (the country in which the share or bond was issued) deducts at the source, a proportion of which can be reclaimed by the owner of the shares or bonds.
Although this tax is reclaimable, research by withholding tax reclamation and class actions recoveries specialists, Goal Group, has revealed that £13.2 billion of investors’ rightful returns from foreign shares and bonds were lost in the latest financial year because withholding tax on dividends and income is not being reclaimed. This represents an increase of nearly 30 percent in the annual amount lost since 2011. UK investors also chalked up the second highest losses, at £680 million, just behind the US, which forfeited £1.63 billion.
These reclamation rates on withholding tax have seen a marginal improvement since Goal Group last examined the situation in 2011, with just under 24 percent now being left unclaimed. However, major increases in market capitalisation and dividend distribution since the last Goal Group study has meant that worldwide unclaimed withholding tax has still seen a substantial net increase.
This rising proportion of portfolio investment devoted to foreign securities means that the lack of tax recovery needs urgent attention from fund managers and custodians. Investors are becoming increasingly rigorous in their scrutiny of investments and are putting pressure on fund managers to provide greater transparency. In fact, some fund managers are even making this fiduciary duty to maximise returns compulsory clauses within the contracts they hold with investors.
As a result of these factors, dividend yields have therefore become a far more highly examined element of the investor’s portfolio, with increased weight being placed on fund managers to devote greater attention to maximise this element of returns. The significance of unclaimed withholding tax on cross-border securities holdings has therefore risen to a prominence it has not enjoyed since the 1990s or early 2000s.
With tax recuperation rates, rules and timings varying widely around the globe, the retrieval method is often described by many as complex. However, this is no longer the case as technology solutions are now more widely available to automate the process, making it a profitable procedure for custodians and fund managers under pressure from their investor clients.
It is clear that as the global economy continues to recover, investors are increasingly adopting an international investment strategy to maximise earnings from securities. Ultimately, all of those in fund management should take the issue seriously and make every endeavour to enhance investors’ returns. A number of leading custodians have already recognised the market opening and effectively utilised tax recovery services, both for their clients and as an inter-bank services opportunity.
However, with 24 percent of recoverable withholding tax lying unclaimed in foreign tax systems every year, there is still a clear opportunity to increase the scope and efficiency of reclamation services.
