Benchmarking and accurately measuring the effectiveness of a withholding tax relief and reclaim process can prove difficult when the only reference point is experience. Therefore, a holistic perspective is required to identify areas of inefficiency and opportunities for process optimisation. Optimising this process can also be challenging, as it requires proficiency with various administrative tasks, clear communication, and diligent monitoring to maintain peak efficiency and mitigate potential risks at every step.
To navigate this complexity, combat the risk of withholding tax leakage and the subsequent erosion of returns, it is essential to adopt a structured approach. Following the key steps detailed below provides a clear pathway to optimising the efficiency of withholding tax relief at source and retrospective reclaims on global investments, offering a framework against which a process flow can be measured and refined.
Broaden Your Knowledge
- Ensure that you are aware of all withholding tax relief and reclaim opportunities for your investment vehicles, including knowledge of withholding tax reduction entitlements and eligibility, and staying abreast of changes as they occur. This includes monitoring changes in double taxation treaty (DTT) agreements around the world, domestic exemptions in investment markets and jurisdictional and/or European Union key court cases affecting the withholding tax environment and legal precedent set therein.
- Verify which investment markets are facilitated by your existing reclaim/relief service provider(s) and confirm each party’s responsibilities for tax document completion.
- Attend advisor-led training sessions, read market updates, and subscribe to key resources in the withholding tax field.
Be Proactive
- Review income data at least quarterly to ensure withholding tax in each investment market is levied at the correct rate. Investigate the reasons for any missed relief at source or reclaim opportunities to prevent re-occurrence.
- Upfront relief is not available in all markets and in some cases is not successful. In most cases, where relief at source is not available, whether that be due to DTT provisions or service provider constraints, a retrospective reclaim opportunity may exist. Reclaims also have deadlines as each market has a statute of limitations for filing. It is essential to prepare and provide all reclaim documents as they are requested to avoid backlog and delays in reclaim filings. Ideally, submitting reclaims in the year immediately following the dividend payment is the most effective method in reducing the time from withholding tax application to refund.
- Identify all investment markets where tax relief at source is supported by your Custodian and file all relevant documentation before the specified deadline.
- Perform quality control checks on all documents to ensure the appropriate forms are being used, completed correctly, and that the form preparer is adequately skilled and resourced.
Monitor Time-Sensitive Tasks
- Ensure all queried reclaims are adequately addressed before their deadlines. Tax authority queries and requests for further information have become increasingly common as tax authorities seek greater comfort surrounding entitlement to withholding tax relief and confirmation of the ultimate beneficial owner of income. Queries impose deadlines, and responding before these deadlines is vital to keeping claims active
- Anticipate unique situations which may require additional resources to manage any associated impacts to withholding tax relief, such as liquidating funds or custodian changes.
- File expiring reclaims before the end of the statute of limitations, which differ from country to country, and in some instances, even treaty to treaty.
Measure Reclaim Success
- Track successful refunds and monitor outstanding refunds against industry timeline averages. Whilst withholding tax recovery is not a quick process, each country has a relatively standard timeline for processing claims and it is important to monitor actual timelines against expected timelines. If there is no feedback on claims from a local tax authority within the expected amount of time, it is important to follow up with the tax authority to ensure there are no outstanding queries or requests that are preventing timely refunds.
- Assess actual reclaim value against your total eligible reclaim value to determine if additional recovery opportunities remain.
- Ensure that there is adequate engagement with the relevant foreign tax authorities to ensure refunds are received promptly.
- Engage with industry experts, custodians, and foreign tax authorities to ensure that the most favourable reclaim method(s) are being utilised to maximise refunds in the most efficient timeframe.
Establish a Framework for Enhanced Tax Efficiency
By following these steps, you establish a solid foundation to manage withholding tax efficiently and effectively. This framework ensures compliance, enhanced operational efficiency, and minimised risks associated with tax leakage. The withholding tax landscape is dynamic, and staying updated with the latest changes is crucial. By consistently applying these steps, you position yourself at the forefront of effective tax management, ready to adapt to new challenges and opportunities in the ever-evolving world of international investment.
For more information on how to improve your withholding tax process speak to a regional specialist.