Are Pension Funds Left at Risk Due to Complex Tax Reclaim Systems?
Several investors are tax-exempt, one such investor being a pension fund. In most cases, pension funds lose approximately 30% of their investment income due to withholding tax (WHT). Regular beneficial owners are generally entitled to recover half of the withholding tax that has been deducted. However, 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. Over $200 billion in taxes is deducted annually from pension funds around the world. As a result, all pension fund administrators should prioritize pension fund withholding tax recovery.
Pension funds are usually exempt from paying tax in their country of residence. However, this may not be true for all the foreign investment jurisdictions in their portfolio. The Pension fund holds the responsibility to provide proof of its tax-exempt status. They must do this to reduce or eliminate the impact of foreign withholding taxes (WHT) on investment income. Pension funds are seldom able to take advantage of their zero-rated status, due to the complexities of the recovery process despite the tax exemptions available to them. Considerable tax leakage is the result.
International tax authorities have ever-increasing statutory and compliance demands and an increased volume of required supporting documentation. These demands have 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. The lower rate is applied assuming that all the necessary supporting documentation is in place. Relief at Source is available to pension funds to reduce withholding tax leakage on their cross-border investments. The custodian bank normally facilitates this. Relief at Source, however, is not always available in all instances. This may be due to several factors such as; shareholders not qualifying, a missed deadline or simply Relief at Source not being offered in that particular jurisdiction. Where Relief at Source is unavailable, the pension fund must submit a withholding tax reclaim to recover the excess tax.
Reclaiming Foreign Withholding Tax is a Difficult Process
Many investors lack the necessary resources and expertise to recover excess withholding tax effectively. In the unlikely event that they do, the process of recovery is onerous and time-consuming. As a result, there is a considerable risk that the recoverable opportunities are overlooked and remain unrecovered. This is due to the ever-changing filing requirements as well as the complexity of the reclaim process. 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.
Global Tax Recovery (GTR) has experience servicing over 60 000 beneficial owners globally. We have seen countless examples of outsourced tax recovery service providers who have applied general rules to pension funds. The service providers do this even though pension funds frequently qualify to recover the full amount of withholding tax. These service providers group pension funds with other investor categories that do not qualify to receive the full refund.
For example, a third party submits a WHT claim on behalf of an investment medium in which a pension fund owns shares. The claims are often lodged using regular treaty rates due to the complex and time-consuming nature of the reclaim process. Additionally, they do this because of the degree of detail required for a successful claim. Therefore, custodians apply a general rule to all investment vehicles. Global Tax Recovery ensures 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 GTR, we can assist in navigating the technical tax complexities and variables of each country’s tax system. This is an invaluable source to investors when pursuing a withholding tax reclaim related to an ECJ ruling.
The common problems for pension funds when reclaiming withholding 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 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. Additionally, they lack an understanding of the particular requirements of the tax jurisdictions where the investments are made. 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 omissions. The tax authorities retain the right and discretion to request additional information 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 ensure that the investment vehicle is properly classified. This must be done to maximize the recoverable opportunity. Specialist expertise is essential to ensure proper treatment is followed. Claims can be denied or refunds reduced as a result of incorrect decisions.
Aside from the above issues, pension funds often fail to take advantage of claims accessible through legal reclaim methods outside their custodian bank’s jurisdiction.
Simplifying pension funds withholding tax recovery process
GTR’s team of tax experts can assist its clients in navigating this complex and tedious process. We provide 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 has a thorough knowledge of international tax law and foreign tax office procedures. This knowledge allows us to ensure that we resolve our client-specific claims successfully and in the shortest possible time.
If your pension fund is not getting the most out of its withholding tax refunds, contact Global Tax Recovery today.