21 October 2017
Ross McGill

Corporate Actions Automation

Ross McGill - TConsult Ltd

15Posts 62,366Views 4Comments
Innovation in Financial Services

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

New Year gifts to foreign tax authorities

07 January 2008  |  2681 views  |  0

We should all be saying Happy New Year!  Well, actually we have already, especially to tax authorities around the world.  Many of them have just received a New Year's present of cash from the financial services industry, funded by investors.

Why?  Well, as cross border investment steadily increases at over 16% a year, each time there's a dividend paid out, there's usually a withholding tax deducted.  This much we (should) all know.  We also know that we've got time to figure it all out and file a reclaim.  That period is called the "Time Bar" or more commonly, "Statute of Limitations".  In many countries that statute of limitations is measured in years.  But from when?  When does the time actually run out?

There are two types of Statute of Limitations, what I would call "absolute" and "relative".  Absolute Statutes are calculated as a set amount of time from the paydate of the security.  So, for example if you received a dividend from a Finnish security in April, you'd have five years to claim and your time would run out in April of the fifth year.  Relative Statutes are calculated with respect to the year of the paydate too.  The difference being that the Statute runs out at the end of the year i.e. December 31st.  So, for example, if you received a French dividend you'd have just two years (different Statute length) and your time would run out at midnight on December 31st.

Thats all well and good if everyone is spending the intervening years figuring out and submitting all their claims.  If everyone did that, the Statutes would be meaningless because everyone would have filed well within the time limit.  The problem is that the processes are so complex that many claims are either not filed at all or are filed late.  After all, research has it that only 7% of the available tax out there ever gets back to the investors.  So, in either case the statute is breached.  So, what happens to the money?  Well it doesn't belong to the investor any more, it belongs to the tax authority where it gently merges within whats usually termed "invisible income".

I'm usually looked at somewhat askance (the "you cannot be serious" look) when I talk about this issue to investor groups.  They note that the Statutes of Limitations are usually at least a year and often many years long, so surely in all that time an entitlement could be figured out and filed?  Well, no.  In the custody world not only are the processes at least 60% manual, the filing is manual too and dependent on documentation as well as data.  Unfortunately, there are many occasions when the process is just not efficient enough or not enough of the right kind of resource is thrown at the issue.

So, December 31st is an important time.  Tax authorities can flick the switch on billions of dollars of cash that no-one can make a claim on any more.  I have to say that, in most cases, they'd really prefer to pay it back to its rightful owners.  That may sound counter intuitive, but from my experience they are more interested in meeting their treaty obligations than in effectively thumbing a nose at investors.  After all, the objective of the treaties is to encourage inward investment by helping foreigners avoid double taxation.  They want the industry to make the claims on behalf of investors.  Its up to us to make sure that each New Year we make our presents to them nice and small.

TagsRisk & regulationWholesale banking

Comments: (0)

Comment on this story (membership required)

Latest posts from Ross

A view from ISITC Boston

26 March 2012  |  3785 views  |  0 comments | recomends Recommends 0 TagsRisk & regulationPost-trade & opsGroupInnovation in Financial Services

Draft FATCA regulations

14 February 2012  |  4416 views  |  0 comments | recomends Recommends 0 TagsPaymentsRisk & regulationGroupInnovation in Financial Services

IRS issues new FATCA guidelines

15 July 2011  |  6708 views  |  0 comments | recomends Recommends 0 TagsPost-trade & opsGroupBusiness Knowledge for IT

US tax authorities on the move

11 October 2010  |  3994 views  |  0 comments | recomends Recommends 0 TagsRisk & regulationPost-trade & opsGroupInnovation in Financial Services

Call for opinion - US withholding tax

26 October 2009  |  3910 views  |  0 comments | recomends Recommends 1 TagsRisk & regulationWholesale bankingGroupInnovation in Financial Services

Ross's profile

job title CEO
location Yateley
member since 2007
Summary profile See full profile »
Founder and CEO of TConsult - a firm specialising in promoting, mentoring, training and advising financial intermediaries on best practice in corporate actions automation and global regulatory complia...

Ross's expertise

Member since 2007
15 posts4 comments
What Ross reads

Who's commenting on Ross's posts