Pension funds are often entitled to reclaim 100% of their withholding tax (WHT) on foreign investment income. But do all Pension Funds know this is the case? Are you claiming the full amount that is owed to you? With over $200bn in taxes withheld from pension funds alone globally, you should ask, how much of it belongs to you.
The Opportunities available to Tax-exempt Investors
An opportunistic environment exists for pension funds seeking higher-yielding tax refunds. This is because pension funds are often entitled to reclaim a higher percentage (when compared with mutual funds) of the tax withheld on income from foreign securities and fixed income instruments.
Furthermore, pensions funds should explore this tax reclaim opportunity because every unrecovered dollar may go straight to the pension fund’s bottom line. This is because pension funds are often classified as tax-exempt entities, meaning that tax credits may not be available.
Where is the withholding tax leak for pension funds?
Due to complex legislation and blanket rules being applied in the reclaim process, pension funds are at risk of losing an average of 15% of their withholding tax refund opportunity.
Within current reclaim processes, outsourced providers or custodians may be applying a blanket rule to all foreign investors. But because pension funds are often eligible to recover 100% of the withholding tax, they often miss out on the difference due to grouping the pension funds claim along with all other types of investors who are not entitled to 100% refund. For example, this can occur when a third party or custodian reclaims WHT on behalf of an investment vehicle, in which a pension fund has holdings, claims are generally submitted based on the standard treaty rates. This is not an error or oversight, it’s just that it’s incredibly time-consuming and complicated for the third-party or custodians to break down the structures into this level of detail and therefore apply a blanket rule. To address this global problem, WTax offers a detailed tax gap analysis for pension funds specifically to make sure they are claiming 100% of the tax they are owed.
In addition, pension funds are also at the mercy of individual tax authorities’ refund decisions. While some cases are still ongoing, there are ECJ (European Court of Justice) rulings available, that allow for investors to claim full withholding tax refunds. The best choice an investor can make in order to reclaim the withholding taxes connected to an ECJ ruling is by working together with a third-party specialist who can provide assistance with all technical tax explanations and understands the nuances of each country’s tax system.
The Current WHT Refund Landscape for Pension Funds?
Recently, the ECJ ruled in favour of a Canadian Pension Fund, College Pension Plan (assets of €3.6bn) in its bid to reclaim the 15% withholding taxes from Germany. The ECJ ruled that by not refunding the 15% withholding taxes owed to the pension fund, Germany discriminated against local schemes.
As the tax treaty between Canada and Germany did not provide for a full refund, the Canadian pension fund had based its refund request on the principle of free movement of capital between EU member states. It had argued that this free movement also applied to transfers between an EU member state and a third country like Canada, and that Germany was restricting this.
Industry organisation Pensions Europe has contended for a long time that obstacles with the withholding tax refund procedures posed a major barrier to cross-border investments in the EU.
As reported in IPE, Pekka Eskola, chief economist of PensionsEurope, said the ECJ ruling against Germany was good news for pension funds with cross-border investments. But he put the development into perspective by emphasising that member states would have to subsequently incorporate the verdict into their tax systems.
“As this is subject to the political will of the individual EU countries, it could take years before pension funds could benefit,” he warned, adding that individual cases could have different outcomes.
The lobbying organisation points out that the European Commission would have to follow up on the ECJ ruling by putting pressure on member states. “Refund processes are complex, expensive, can last up to 10 years and could incur half of the expected refunds in costs,” says Eskola.
One of the ways WTax is addressing the above-mentioned delays is by working closely with foreign tax authorities to analyse rulings together and fast track refund decisions.
What Can Your Pension Fund do to Reclaim 100% of the Withholding Tax that it is Owed?
There are three mechanisms in which withholding tax refunds can be pursued, namely via domestic exemptions, double taxation treaties and ECJ rulings.WTax can assist pension funds with the reclaiming of their withholding taxes through these three reclaim mechanisms. We also provide our service on a contingency basis meaning a percentage fee is only charged when refunds are paid. Given the current climate, a risk-free, contingency-based fee is the most sound and conservative decision your company could make when trying to seek withholding tax refunds.
In conclusion, if your pension fund is not maximising its withholding tax refund opportunities, speak to one of WTax’s consultants today.
