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New Year gifts to foreign tax authorities

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.

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Ross McGill

Ross McGill

CEO

TConsult Ltd

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26 Nov 2007

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Yateley

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This post is from a series of posts in the group:

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