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Are Pension Funds Left at Risk Due to Complex Tax Reclaim Systems?

There are several investors that are tax-exempt, one such investor being a pension fund. In most cases, pension funds lose approximately 30% of their investment income as a result of withholding tax (WHT). However, unlike regular beneficial owners who are generally entitled to recover half of the withholding tax that has been deducted, pension funds and other zero-rated beneficial owners/investors are often entitled to recover all of their foreign withholding tax. Having said that, very few pension funds are aware of this. With over $200 billion in taxes deducted annually from pension funds around the world, withholding tax recovery should be a priority to all pension fund administrators.

While pension funds are usually exempt from paying tax in their country of residence, this may not be true for all the foreign investment jurisdictions in their portfolio. When it comes to reducing or eliminating the impact of foreign withholding taxes (WHT) on investment income, the responsibility falls on the pension fund to provide proof of its tax-exempt status. Due to the complexities of the recovery process, pension funds are seldom able to take advantage of their zero-rated status, despite the tax exemptions available to them. This results in considerable tax leakage.

International tax authorities’ ever-increasing statutory and compliance demands, in combination with the increased volume of required supporting documentation, has led to a massive increase in outstanding qualifying tax claims.

Relief at Source

Relief at Source is a process which allows qualifying shareholders to be taxed at the lower treaty rate when the dividend is paid, assuming that all the necessary supporting documentation is in place. Relief at Source is available to pension funds in an effort to reduce withholding tax leakage on their cross-border investments and is normally facilitated by the custodian bank. There are however instances where Relief at Source is not available. This may be due to several factors such as; shareholders not qualifying, a deadline was missed or simply due to Relief at Source not being offered in that particular jurisdiction. Where Relief at Source is not available, the pension fund is required to submit a withholding tax (WHT) reclaim to recover the excess tax.

Reclaiming Foreign Withholding Taxes is a Difficult Process

Many investors lack the necessary resources and expertise to recovery excess withholding tax effectively. In the unlikely event that they do, the process to recover is so onerous and time-consuming that there is a considerable risk that the recoverable opportunities get overlooked and remain unrecovered. This is not due to a lack of effort, but rather, due to the ever-changing filing requirements as well as the complexity of the reclaim process. For example Global Tax Recovery uses the following methodologies for recovery purposes; double taxation agreements, domestic legislation provisions, and European Court of Justice (ECJ) Court Case Precedents.

Pension fund withholding tax leakage

As mentioned previously, on average pension funds lose approximately 30% of their investment income on withholding tax leakage.

In Global Tax Recovery’s experience of servicing over 60 000 beneficial owners globally, we have seen countless examples where outsourced tax recovery service providers have applied general rules to pension funds despite the fact that they frequently qualify to recover the full amount of withholding tax. This applies most commonly when pension funds are grouped with other categories of investors who do not qualify to receive the full refund.

An example of this occurs when a third-party submits a withholding tax claim on behalf of an investment medium in which a pension fund owns shares. Claims are often lodged using regular treaty rates as a result of the complex and time-consuming nature of the reclaim process and the degree of detail required for a successful claim, so custodians apply a general rule to all investment vehicles. Global Tax Recovery ensure that pension funds receive the full amount due to them wherever possible.

Pension funds are subject to the refund decisions of the specific tax authorities within which they are invested. While there are cases currently pending, there are ECJ (European Court of Justice) judgements that allow investors to receive full refunds of withholding taxes. By working with Global Tax Recovery, we can assist in navigating all the technical tax complexities and variables of each country’s tax system and is an invaluable source to investors when pursuing an withholding tax reclaim related to an ECJ ruling.

The common problems faced by international pension funds when reclaiming tax

Reclaiming tax may appear straightforward, but upon closer examination, a pension fund’s financial team face several obstacles, including:

Specific filing requirements: It is often the responsibility of the pension fund’s finance department to respond to tax office queries and provide supporting documentation. In our experience, even the most competent pension fund administrators lack a clear understanding of withholding tax recovery as well as the particular requirements of the many tax jurisdictions where invested. A basic request can take several days or possibly weeks to complete as a result of this.

Lack of holistic oversight: Finance teams often lack clarity as to the status of WHT claims. As a result of the multiple steps and specific deadlines involved in the process of reclamation, financial teams frequently omit specific requirements and fail to meet submission deadlines.

Queries and rejections: International tax authorities are infamous for making the reclaim process onerous. Claims are rejected or questioned for even the most minor error or omission. The tax authorities retain the right and discretion to request additional information in order to proceed with the reclaim. The burden of providing such information falls onto the pension fund’s employees. This process can go on for several years, especially in particularly complex jurisdictions such as Switzerland.

Challenges in classification: When filing a tax claim, particular care must be applied to ensuring that the investment vehicle is properly classified in order to maximize the recoverable opportunity. Accordingly, specialist expertise is essential in ensuring that proper treatment is followed as an incorrect decision could result in claims denied or refunds reduced.

Aside from the above-mentioned issues, pension funds often fail to take advantage of tax reclaims accessible through legal reclaim methods outside their custodian bank’s jurisdiction. By using Global Tax Recovery, withholding tax refunds are obtained across all relevant jurisdictions using the following three methods: Domestic Exemptions, ECJ rulings and Double Tax Treaties.

Simplifying the withholding tax recovery process

Global Tax Recovery and their team of tax experts are able to assists its clients in navigating this complex and tedious process. By providing a simple and seamless turnkey solution to the recovery of withholding tax, we ensure a hassle-free claim process by managing the recovery process from beginning to end. Global Tax Recovery’s thorough knowledge of international tax law and foreign tax office procedures ensures that we resolve our clients specific claims successfully and in the shortest possible time.

If your pension fund isn’t getting the most out of its withholding tax refunds, contact Global Tax Recovery today.

There are some funds that are tax-exempt and one example of these are pension funds. In many cases, pension funds are entitled to a full refund of their withholding tax (WHT) on foreign investment income. But not all Pension Funds are aware of this and with over $200 billion in taxes deducted from pension funds around the world, all pension funds should be considering how much of this is owed to them.

While pension funds are usually exempt from paying tax in their country of origin, this may not be true for the foreign investments in their portfolio. When it comes to reducing or eliminating the impact of foreign withholding taxes (WHT) on investment income, it is the responsibility of the pension fund to provide proof of its tax-exempt status. Due to the complexities of the recovery process, pension funds are not always able to take advantage of their status despite the tax exemptions available to them from foreign tax authorities. Therefore, they do not maximize their refund opportunities. International tax authorities’ ever-increasing complexity and increased volume of required documentation has led to a growing accumulation of outstanding tax claims and increased pressure on the employees of the pension fund to deal with queries.

Relief at Source

Relief at Source is available to pension funds in an effort to reduce withholding tax leakage on their cross-border investments and is normally facilitated by the custodian bank. Relief at Source means your contributions are deducted from your income after your wages have been taxed. Then tax relief is applied for on your behalf. There are some instances where Relief at Source is not available either because this relief is not applicable in the foreign jurisdiction or because a deadline was missed. Where Relief at Source is not available, the pension fund is required to submit a withholding tax (WHT) reclaim to recover the excess tax.

Reclaiming Foreign Withholding Taxes is a Difficult Process

Many investors lack the necessary resources to resolve withholding tax leakage, and even if they do, the process is so time-consuming that those resources may fall short of maximizing the opportunity for refunds. This is not due to any shortage of effort but rather, there are numerous ever-changing elements that you need to be familiar with if you want to have a chance of reclaiming 100% of what’s owed to your company. These include double taxation agreements, domestic legislation provisions, and European Court of Justice Court Case Precedents. Unfortunately, most investors give up before even starting their quest.

An accrual is normally recorded when a pension fund is permitted to file a tax reclaim. Supplying the necessary information and evidence to support the tax claim is the duty of the pension fund’s finance team. The custodian files the tax reclaim after this information is submitted. In the end, the accrual will be absolved if the withholding tax reclaim fails.

Pension fund withholding tax leakage

Pension funds are at danger of losing an average of 15% of their withholding tax return potential due to complex legislation and blanket rules imposed in the reclaim procedure.

Some Outsourced tax recovery service providers may apply the general rules to all international investors in current reclamation operations despite the fact that pension funds frequently qualify to recover 100 percent of withholding tax. Therefore, pension funds miss out on the differential amount due to their claims being grouped with those of all other categories of investors who are not eligible to receive the full refund.
An example of this occurs when a third party reclaims withholding tax on behalf of an investment vehicle in which a pension fund has shares, claims are often lodged using regular treaty rates. This happens due to the complex and time-consuming nature of breaking down the structures into the level of detail required, so custodians apply a blanket rule to all investment vehicles. This is a global issue which Global Tax Recovery aims to correct and ensure that pension funds receive the full amount due to them.

Pension funds are subject to the refund decisions of individual tax authorities. While some cases are currently pending, there are ECJ (European Court of Justice) judgements that allow investors to receive full refunds of withholding taxes. Working with a third-party specialist who can assist with all technical tax explanations and understands the intricacies of each country’s tax system is the best choice an investor can make in order to reclaim withholding taxes related to an ECJ ruling.

The Common Problems faced with Tax Reclaims by International Pension Funds

This method appears straightforward, but upon closer examination, pension fund financial teams face a number of difficulties, including:

Tax authority documents: It is often the responsibility of the finance department of the pension fund to provide responses and supporting documentation. The pension fund finance team may lack clear understanding and instructions on the particular requirements of the relevant tax jurisdiction. A simple request can take days or even weeks to complete as a result of this.

Lack of holistic oversight: Finance teams often struggle to get a comprehensive perspective of the status of all withholding tax claims based on the information provided to the pension fund. As a result of the multiple steps and specific deadlines involved in the reclaim process, financial teams are frequently under pressure to meet filing requirements.

Queries and rejections from tax authorities: International tax authorities are difficult to navigate and often claims rejected or queried as a result of the tax authorities’ caution. The tax authorities may request additional information in order to proceed with the reclamation process. Many pension fund finance teams are confronted with spending a great deal of time fighting a rejection in order to gain a refund. This process may go on for many years after the tax has been imposed especially in particularly complex jurisdictions such as Switzerland.

Challenges in classification: When filing a tax claim, pension funds must verify that the structure is properly classified in order to maximize the recoverable tax values. Expert understanding is essential to determine the classification, as an incorrect decision could result in claims being denied or refunds being reduced.

Aside from these issues, many pension funds fail to take advantage of tax reclaims accessible through legal claim methods or in markets that may be outside their custodian bank’s jurisdiction.

Withholding tax refunds can be obtained through three methods: domestic exemptions, double tax treaties, and ECJ rulings. Through these three reclaim processes, Global Tax Recovery will assist pension funds in reclaiming their withholding taxes.

Simplifying the withholding tax recovery process

Global Tax Recovery and their team of tax experts are able to assists its clients in navigating this difficult process. by providing a simple and seamless turnkey solution to recover withholding taxes. Our interests are always to achieve the maximum returns successfully and timeously by using our knowledge of international tax law and foreign tax office processes. We take on all the risk, if we can’t successfully claim your return, you don’t pay.

If your pension fund isn’t getting the most out of its withholding tax refunds, contact Global Tax Recovery today

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