Over £10 billion in unreclaimed withholding tax lost as cross border investments surge

Global cross border investment losses on unreclaimed withholding tax have reached £10.72 billion, a new report reveals.

UK investors alone, have relinquished more than £1 billion in their rightful returns, according to the report from GOAL Group, the leading tax reclamation services specialist.

It says that around a quarter of all reclaimable tax on cross border shares and bonds are likely to be lost from last year’s earnings because withholding tax on dividends and income is not being properly reclaimed.
 
As cross border shareholdings have become more popular, lost returns through unreclaimed tax have escalated at a significant rate since 2005 when GOAL last examined the situation. According to statistics from the International Monetary Fund and from global stock exchanges, the market capitalisation of global equities rose 79% between 2001 and 2009, whereas the value of cross-border equities investments rose 163% over the same period. Cross border shareholdings have therefore risen at something around double the market rate, it points out.
 
Also 2010 saw a resurgence in equity dividend payments as markets grow and this trend is likely to continue in 2011 amid enhanced corporate confidence and economic recovery, the report adds. In parallel, the value of bonds listed on global markets has escalated across the decade. In light of the increasing popularity of dividend payments and cross border securities, unreclaimed tax will continue to rise unless reclamation levels improve.

Income earned on cross border securities is subjected to withholding tax in the country of origin, but a portion of that tax may be reclaimed by custodians on behalf of their clients. Many leading custodians have already recognised the market opening represented by effective tax reclamation services, both for their FM clients, and as an interbank services opportunity. But with around 25% of reclaimable withholding tax lying unreclaimed in foreign tax systems every year, there is a clear opportunity for custodians to increase the scope and efficiency of reclamation services.

‘As the global economy continues to gain steam, companies are eager to demonstrate to investors, through dividend payments, that they have put the financial crisis behind them and are now well into the recovery mode in 2011,’ said Stephen Everard, chief executive officer, GOAL Group.

‘Since savvy investors are increasingly adopting a global investment strategy to maximise their earnings from securities, both equities and bonds, a substantial proportion of their rightful returns will risk languishing in foreign tax regimes if the reclamation of withholding tax is not treated with the due attention it deserves,’ he explained.

‘All players in the fund management community should take the issue seriously and make every endeavour to enhance investors’ returns. Technology is widely available today to automatically perform the highly complex task of reclaiming withholding tax, a process which has to incorporate varying data, formats and procedures from a multiplicity of different legislatures around the globe. So there is really no pretext for fund management and custodians not to harness these technology-based services to the benefit of their investor clients,’ he added.