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Foreign Investments: The Challenges of Withholding Tax

Foreign Investments: The Challenges of Withholding Tax

Jan 08, 2020

This article explores the complexities of withholding tax reclaim for foreign investors and how you can maximise on tax refund opportunities.

2020 looks set to be the year where investors secure profitable growth by venturing into new demographic segments and geographies, leaving their comfort zones to perform new activities and harnessing investment technology to unlock agility and value (source). But despite technological uptake and a more explorative approach to investing, most investors are still completely in the dark when it comes to the complex maze that is foreign dividend withholding tax benefits – An often overlooked aspect of profit contribution despite it adding considerably to ROI.

In this article we discuss the challenges of withholding tax refunds, why most investors are not maximising  these refund opportunities and how to turn what most consider sunk tax leakage into significant improvements in fund performance.

Are Investors Aware of Withholding Tax Benefits?

The most prevalent challenge in the withholding tax space is a lack of knowledge of the available claiming mechanisms. An eye-watering 65% of investors currently recover absolutely no withholding tax  and of the 35% of investors that are claiming, they are often coming up short by 40% on their savings. Furthermore, despite the European Commission’s Directorate-General Taxation and Customs Union issuing a Code of Conduct on Withholding Tax that was aimed at providing a set of pragmatic approaches to improve the efficiency of current withholding tax reclaim procedures, the process is still extremely onerous and outdated.

Foreign Withholding Tax Reclaim is a Cumbersome Process

Many investors don’t have the correct resources in place to address withholding tax leakage and even if they do, the process is so cumbersome that those resources can fail at maximising the refund opportunities. This is in no way due to a lack of hard work or skills, but because there are hundreds of double taxation agreements, domestic legislation provisions and European Court of Justice Court Case Precedents (Which we’ll discuss in more detail further on) that you need to understand intimately if you want to have a shot at reclaiming 100% of what’s rightfully owed to your business. Unfortunately, most throw in the towel before the journey even begins. 

Even the EU Council  identified inefficiencies in cross-border withholding tax reclaim procedures as one of the biggest barriers to an effective capital market. Accordingly, the EU council’s code of conduct emphasizes that existing withholding tax procedures can be generally demanding, resource-intensive and costly for investors. Ultimately, this results in many investors simply foregoing their right to reclaim their withholding tax.

Language Barriers and a Lack of Fiscal Representation

We mentioned above that there is an enormous amount of global legislation, policy and laws to understand in order to affect successful refunds. Now add the fact that you’d have to deal with each tax authority in their local language and most demand that you have local fiscal representation in order to claim successfully. For any investor who is investing in multiple foreign jurisdictions, this becomes a logistical and administrative nightmare. And, with ongoing compliance changes and legislative amendments, it’s a wonder that even 35% of investors are claiming back some of their taxes. 

Claiming Withholding Tax Refunds Before They Expire

Every jurisdiction has its own statute of limitation with some existing that match the dividend payment date throughout the year while others exist solely at the end of a calendar year. If you are not on top of these deadlines, it’s easy for withholding tax value to simply expire. 

Claim Submitted? You’re Only Halfway There!

Unfortunately, simply submitting a claim does not ensure a successful refund. Tax authorities apply stringent rules and laws that make the process even more complex while providing very little guidance. The onus is on the taxpayer to get their money back. Most tax authorities require manual claim submissions of which the paperwork must be emaculate and all possible queries pre-answered. Furthermore, many tax authorities have recently tightened their belts, querying claimant’s status and eligibility for benefits before paying out. It really takes a team of the finest lawyers and CPAs to provide the necessary analysis, explanations and breakdowns required to ensure queries are answered successfully and refunds are ultimately received. 

Unless you have this dedicated team as well as a strong debtors team to follow up on your refunds, chances are you will be waiting a very long time for your refund. One of the benefits of using WTax is the use of our inhouse Account Managers, Legal team and debtors clerks who have the experience to answer any queries and the resources to  follow up on your refunds often. For example, our debtors team follow predetermined expected deadlines while using auto-flag software to alert them to exceeded expected refund timelines. Another advantage of using WTax is harnessing our relationships with the various tax authorities which we’ve built over years of working together.

European Court of Justice Claims (ECJ)

This area is a significant tax leakage pitfall for most investors. ECJ claims are the most under-researched and complex withholding tax reclaim mechanism available and these claims require intense understanding of European fund structures as well as those in the claimant country.. 

ECJ claims are based on Article 63 of the Treaty of the Functioning of the European Union (TFEU), and can be applied for based on the precedent set by European court cases Aberdeen (2009), Fokus Bank (2004), and Santader (2012) – the reason these claims are often referred to as Santander, Aberdeen and Fokus Bank claims. 

Put simply, the above cases set the precendent that there should be no discrimination between a domestic fund and a comparable foreign fund when withholding tax on investment income as this would be contrary to the principal of the free flow of capital (as defined in Article 63 of the TFEU).

Consequently, investors both within the EU and outside the EU can reclaim the entire amount of tax withheld on dividends and interest from 10 European Union member states. The problem is that investors are not taking advantage of the mechanism. Mainly because the process differs significantly from the easier DTT process in that there are additional requirements, such as proof of comparability of the fund, an in-depth analysis of the investor’s fund structure and the provision of multiple supporting documents. 

While they are complicated and require extra elbow-grease, completing ECJ claims can increase withholding tax yield by up to 60%. It’s not a question of should you be looking into it; but when.

What You Can Do to Overcome the Challenges of Withholding Tax

Make Sure You Are Utilising All the Withholding Tax Reclaim Methodologies

Ask yourself and your team if you’ve looked into all possible avenues of reclaim. There are double taxation agreement claims, Domestic Exemption claims, and ECJ claims. Claiming back 100% of the tax you are rightfully owed requires looking into all three mechanisms.  

Speak to a Withholding Tax Recovery Specialist for Free Advice

Outsourcing your withholding tax recovery to a specialist such as WTax, guarantees that all three mechanisms mentioned above will be explored and that any refund potential is maximised. We also offer free consultations where we can discuss your needs and explore all reclaim opportunities. Ultimately, engaging with dedicated experts ensures better quality claims and faster, more efficient refunds. 

Speak to Your Custodian

It’s important to get a sense of how successful withholding tax claims have been in the past, what the custodian’s pressure points are and where they may not offer withholding tax recovery services such as ECJ claims.

Conclusion

In this article we have made you aware of the many pitfalls of unclaimed withholding tax and have also provided practical tips on how to maximise your withholding tax refunds. Making the right decisions on your foreign investments is hard enough. The challenges of foreign withholding tax reclaim do not have to add to that burden. Withholding tax on foreign investments should not hold you back from achieving growth. 

About WTax:

WTax is a foreign withholding tax recovery specialist that provides wholly-outsourced withholding tax refund solutions to all and any parties seeking to optimize their withholding tax benefits processes and capabilities. WTax attends to all of the administrative, technical and practical tasks in the foreign withholding tax recovery process, providing leading solutions to unlock recovery opportunities in over 40 jurisdictions.

Book your free consultation with one of specialists below or email us at info@WTax.co

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