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Considerations for setting up a proper process for efficient and effective global withholding tax recovery

2022  | ARTICLE

Considerations for setting up a proper process for efficient and effective global withholding tax recovery.

September, 2022

Scope of this document

Optimizing and managing withholding tax for global public equities investment portfolios is complex and time consuming. It requires commitment from and close cooperation between different stakeholders, most notably the investor, the investment manager, the custodian and tax advisors. The objective of this document is to give the reader a better understanding and appreciation of the intricacies of global withholding tax recovery. It also sets some parameters that may help in setting up a proper process for timely collection of data and processing of tax reclaims while limiting as much as possible the impact on stakeholder resources by preventing excessive communication and ‘noise’. Based on our years of practical experience, a good upfront understanding of the following three key aspects is essential to achieve an efficient and effective operational withholding tax recovery infrastructure:

  1. Clear processes to collect claim documentation need to be in place, and roles and responsibilities of all actors involved in pre-completing, preparing, requesting and reviewing documents must be clearly defined (preparation)
  2. A solid service infrastructure needs to be in place. This means having a combination of the required staffing and technology in place to effeciently process and monitor requests for information and documentation and convert such information and documentation into complete and admissible tax reclaims (operation)
  3. Clear and transparent rules to stop processes when stalling or failing as a consequence of non-compliance of actors involved (termination)

Information and data collection

For the preparation and filing of withholding tax claims, a considerable amount of documentation is required. This documentation may be required to determine claim eligibitly but may also be needed to demonstrate the validity of claims and accuracy of claim amounts.

Like all jurisdictions have their own procedures for withholding tax reclaims, they all have their own requirements for claim documentation. This may vary from specific official forms to supporting documentation to unoffical practices.

The resulting wide variety of documentation may come from a different stakeholders that will inevitably be involved in the process. These stakeholders may depend on the jurisdiction where claims are filed and typically include investors, custodians, tax offices and the fund(manager(s), but can also include local tax agents and guarantors, financial supervisory bodies, auditors and actuaries.

Where some of the documenation may be readily or even publicly available (as it was issued or created for other purposes, like annual accounts, articles of incorporation, tax legislation), some documentation is only issued upon specific request and typically comes at a price as well (e.g. tax vouchers, certificates of residency etc.). On top of that, some documentation requires additional handling such as legalisation, apostilling, translation or certification.

For a proper functioning service it is important that for the documentation collection part

  • processes are understood by key actors
  • roles and responsibilities are clarified between key actors
  • costs and charges are understood and alligned with potential benefits

In the following paragraphs we elaborate on the various types of documentation and address high-level roles for parties involved in managing/executing the process.

Claimant withholding tax classification

The tax classification of the claimants (this may be fund vehicles, and or their participants) in scope is one of  the first and one of the most important steps of the process. Claimants may be investors, fund vehicles through wich investors invest, or both.

In order to file complete and admissible withholding tax reclaims – resulting in the highest chance of success – it is important to understand for every investment jurisdiction (reclaim country) in scope whether fund vehicles are considered tax transparent or opaque, or eligible for withholding tax relief in another way.

Without having a proper classification in place, there is a risk that claims are filed at the incorrect level, resulting in a potential over- or under-withholding of tax.

Fund tax classification documentation is key in understanding the withholding tax eligibility. The positions of the fund can be summarised in the following categories:

  1. tax transparent: the fund is disregarded and the participants in the fund are the rightful claimants and therefore a part of the reclaim process
  2. opaque and eligible to treaty benefits: the fund itself is the tax ‘owner’ of the income and can file reclaims in it is own name and for its own benefit.
  3. opaque and not eligible to treaty benefits: the fund is the tax ‘owner’ of the income, however foreign authorities do not consider the fund a resident for tax treaty purposes and therefore disallow the application of treaty benefits
  4. opaque and eligible to local market benefits: the fund itself is considerded the ‘owner’ of the income for tax purposes and can obtain relief from taxation based on provisions in local (claim market) law (e.g. exemption of tax paid to UCITS/AIF (which is not a tax qualification).
  5. tax transparent but treated as opaque for local market benefits: while the fund itself is not considerded the ‘owner’ of the income for tax purposes it still can obtain relief from taxation based on provisions in the foreign law (e.g. exemption of tax paid to UCITS/AIF (which is not a tax qualification).

Withholding tax classification documentation

Type

Taxology

Fund/ManCo

Investor

Impact

Fund status documentation

Request

Deliver

n/a

Low

Investor status documentation

Request

n/a

Deliver*

High

* ) Failure to timely deliver the requested documentation may result in claims not being filed or procedures being forfeited (e.g in the case of a Q&A by the tax office).

The relevant treatment of a fund in the first place depends on the interpretation of foreign tax legislation on the classification of the fund and the explanation of  tax rules in the source country.

This classification is based on an analysis of facts and circumstances surrounding the fund. While such analysis should be performed upfront, tax authorities may typically also request certain documents to verify the eligibility to certain tax benefits.

Fund documentation

Documentation to classifiy a fund vehicle (examples)

Fund/ManCo

Taxology

Impact

·         Paragraphs of relevant tax legislation

·         Statements from tax authorities on exemption

·         Terms and conditions of the fund

·         Investment policies

·         Information memorandum / Prospectus

·         Annual accounts

·         Financial regulation

·         Attestation of supervision from the local financial supervisor

·         Extract of register of supervision

Collect documentation and arrange issuance of documentation from external parties like regulators / Legalise

Request * )
Review
Subselect
Translate

Low **)

*) documentation requests typically are a one-off ‘bulk’ exercise by the fund (manager), where all documentation is shared. Taxology will arrange all further processing of information for the subsequent processes.

**) Which classification documents are required depends per fund vehicle and per jurisdiction. In general the collection of Fund documentation is considered a limited effort by the fund manager. Typically documents are readily available with the exception of regulatory attestations. It is important that documents are accurately matched to claim years.

Fund participant documents

When claims are filed in the name of a fund participant, documentation evidencing the tax status of the participants is required. Such documentation may include for example articles of incorporation or founding statutes/legislation, investment policies, applicable tax legislation, applicable financial regulation, annual accounts. Documents typically obtained from third parties include proof of financial supervision (attestation), extracts from commercial registers etc.

Challenges

Requesting, collecting and monitoring the requests of data from fund participants is typically the most challenging part of the process where claims are filed directly in the name of the fund participants.

  1. Participants in a fund may not (timely) colloborate with documentation requests for any of the following (non limitative) reasons:
    1. Lack of urgency: the information is not requested from the right person, or there is no ‘right’ person in the organisation
    2. Lack of competence: the person handling the request does not know how to deal with it
    3. Lack of incentive: the amounts recoverable do not justify the resources at the level of the participant.
  2. Participants may give incorrect statements or represenation of their position, facts and circumstances.

Solutions non-collaboration

There are various solutions to deal with the practical difficulties of fund participant dependency. The two most prominent are:

  • Exclusion of services; non collaborative fund participants will not be supported by the program. Claims are not pursued or abandoned. No fees are due.
  • Shareclasses; non collaborative fund participants are placed in a shareclass (apart from colloborative participants) which shareclass has separate fund accounts which are not being serviced from a tax perspective. Shareclasses with collaborative participants are obtaining tax services.

Solutions incorrect representations and statements

Investors should provide adequate indemnification for incorrect claims as a consequence of their warranties and representations. In principle all claims processes and documents will be set up in a way to limit the chance of non-compliance by the fund participants. However, confirmation of certain standards or data reflecting the Fund participants’ position will remain the ultimate responsibility of the Participant.

Examples of Investor Documentation

Documentation to classifiy a vehicle (examples)

Investor

Fund/ManCo

Taxology

Impact

·         Paragraphs of relevant tax legislation

·         Statements from tax authorities on exemption

·         Articles of incorporation/statutes

·         Investment policies

·         Annual accounts

·         Applicable pension regultion

·         Attestation of supervision from the local financial supervisor

·         Extract of register of supervision

Collect documentation and arrange issuance of documentation from external parties like regulators

/ Legalise Documents (if needed)

n/a

Request

Review

Subselect

Monitor

Translate

High *)

 

Authorisation / power of attorney

Depending on the claim type and country generic or specific powers of attorney are required to be in place in order for Taxology to file claims and represent the relevant client vis-à-vis the tax office. All documents need to be executed in the highest possible standard (legalisation) to provide coverage in as many jurisdictions as necessary.

 

 

Power of attorney

Type

Taxology

Fund/ManCo

Investor

Effort

Generic tax power of attorney funds 1.)

Prepare Documents /Request/Monitor Completion

Authorise

n/a

Low

Specific tax power of attorney funds 2.)

Prepare Documents /Request/Monitor Completion

Authorise

n/a

Low

Power of attorney vs custodian 3.)

Discuss

Draft/Authorise

n/a

Low

Generic power of attorney fund participants 4.)

Prepare Documents /Request/Monitor Completion

Distribute/Monitor*

Authorise

High

Special power of attorney fund participants 2.)

Prepare Documents /Request/Monitor Completion

Distribute/Monitor*

Authorise

High

1 ) A generic legalised power of attorney for Taxology to represent the relevant party in their best interest when claims are filed in jurisdictions without specific poa documentation requirments.
2) Official template or form based powers of attorney for representation prescribed by the source country (e.g. form 2848 US, form PPS1 Poland)
3) Power of attorney to directly request all relevant tax documentation from the custodian.
4) Generic power of attorney which could be part of the subscription to service package

Withholding tax data

Claims need to be supported with data and documentation that evidence the withholding of tax on payments received in the fund, and perhaps the allocation to the fund participants. This data typically is delivered by the Fund custodian(s) network, transfer agents or the Fund (management company).

Types of custody tax data

Type

Taxology

Manager

Investor

Impact

Proof of payment/Dividend Vouchers 1.)

Request and review

Approve

n/a

Low

Income and Reclaim Data 2.)

Request and review

Approve

n/a

High

Custody and Fund Account Data 3.)

Request

Review

n/a

Low

Position reports 4.)

Request and review

Approve

n/a

Low

Swift messages 5.)

Request and review

Approve

n/a

Low

Bank Statements 6.)

Request and review

Approve

n/a

Low

Sub Custodian Appointment letters 7.)

Request and review

Approve

n/a

Low

1.        Documents issues by the local and/or global custodian, evidencing the payment of the income to an investor account and the withholding of tax on such payment.

2.        Excel files (income ) for calculation and review purposes

3.        Mapping of accounts to funds etc.

4.        Holding of securities reports in specific markets for demonstrating onwership

5.        Message to evidence payment trail and withholding of tax amounts at source.

6.        Decleration of financial account ownership for claims processing, or payment trail review by tax office

7.        Authorisation and/or appointment of local market custodians for tax processing and document releases

Certificates of tax residency

Tax residency ceritificates support that a claimant (in the eyes of its home country’s tax office) should be objectively considered eligible for the application of a tax treaty. To obtain a certificate of residency a claimant has to be liable to tax in its home jurisdiction. Tax offices are however often lenient in issuing tax residency certificates to pension funds/plans that are exempted from corporate income tax.

For collective investment funds that are considerd to be opaque for tax purposes in their home country, while being effectively exempt from corporate income tax, treaty access (and obtaining certificates of residency) is less evident, however sometimes specific treaty provisions are in place to remedy the absence of the fund being liable to income tax, by specifically listing funds as having treaty access.[1]

Table 3: Certificates of residency

Type

Taxology

Manager

Investor

Impact

Certificate of Residency Funds

Request or Authorise

Request or Authorise

n/a

Low

Certificate of Residency Fund Investors*

Request or Authorise

n/a

Request or Authorise

High

* )The procedure for the application of US residency certififcation documents (form 6166) from the IRS through submission of form 8802 may be ‘outsourced’ by the investors to third parties, provided such authorisation is formally granted (via a form 2848). As the (timely) completion of tax technical documentation by clients is a similar challenge regardless of it being a form 8802 or form 2848, it is recommended to use technological solutions to send pre-completed forms 8802 to clients which include simple instructions for finalization.

[1] A typical and impactful example of such difference is the treaty between the US and Ireland vs. the US and Luxembourg. Where the US, Ireland treaty offers access to the treaty for certain Irish fund vehicles, the Lux treaty doesn’t. As a consequence SICAVs will typically pay the full 30% withholding tax while ICAVs and PlCs can – under conditions of passing the limitation on benefits test – apply the 15% rate.

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