It's always seemed strange to me that people only get really interested in withholding tax when economic times start getting tough. The sub-prime mess which has led to a range of spin-off crises at banks (retail and wholesale) and brokers, seems to be raising
this old penny again. I guess its not really surprising given human nature - when times are good and profits are soaring, the relative value of adding 150 basis points in performance must be a bit of a nuisance to contend with (sic). But when times get tight,
those same 150 basis points can seem very attractive, and the work needed to get hold of them seems much more worthwhile.
The fact is that it shouldn't matter what kind of times we're having, if we could improve investor returns and make a profit doing it, there are all sorts of benefits to be gained, not the least of which is financial. The process of optimising tax does
have advantages and disadvantages. The disadvantage is that its complicated and therefore costly to do. The advantage is that its complicated and therefore represents a competitive opportunity.
When I first got into this industry eleven years ago, I sat with the fund accountant for a mid sized pension fund having just found around £2 million in tax that was recoverable from foreign governments based on their long positions in the market over the
preceding two years. The accountant's position was that the amount was "not material" because the fund's AUM was over $5 billion. Today, that fund accountant would probably get fired (or should be) for taking that position. Firstly, the money isn't his,
it's the entitlement of the members of the fund and they have a reasonable expectation of best practice. Second, £2 million is £2 million, a lot in anybody's books (except his of course!). The reality is that whether its important from the fund manager's
perspective has nothing to do with the relative values of recoverable and AUM. Its got everything to do with risk and liability mitigation and whether the cost of recovery is larger than the amount recovered.
The issue of risk and liability mitigation flows from the fact that fund accountants as well as a whole slew of people in the custody and brokerage chain should know about the issue because it affects their customer's financial performance in a "material"
way. Yet I still come across firms who either have little or no corporate memory, knowledge, or whose institutional activity is limited in some way (e.g. only top customers, no omnibus accounts or partnerships, no small reclaims, only in certain markets etc...).
Research in the 90s indicated that tax withheld and not optimised, was running at about US$10 billion a year. Last year similar research indicated that the amount was actually nearer US$200 billion a year, thats just under 200 basis points on global assets
under management. So, the problem with coming at this issue only when times get tough, is that you're always on the back foot. Is someone else doing it better, more efficiently, to greater scale and scope because they've been hitting it consistently? What
looks like a simple matter of competitive differential in acquiring new business mandates can easily lead to a loss of current customers (at best) and customers looking for reimbursement of perceived losses (at worst).
So while I applaud the renewed interest in withholding tax optimisation as times get tough, I do have a raised eyebrow (metaphorically) as to why such a large proportion of the industry seems to blow hot and cold depending on where we are in the economic
cycle, on an issue that is so fundamental and of enduring concern to investors.