Ensure timely, accurate and complete identification and collection of entitlements
Income arising from a securities portfolio is generally subject to deduction of withholding taxes in the issuers' countries. Depending on the owner's tax status, the type of security and other factors, relief from some of the withholding taxes may be due. The basis for tax relief lies in exemptions and lower tax rates specified in the local laws of some issuers' jurisdictions and in a network of bi-lateral tax treaties which the government of the owner's country may have concluded with a range of issuers' countries. Service providers must maintain complete, accurate, up-to-date information and declarations from their clients as proof of eligibility for tax relief. Above all, there must be absolute clarity as to the tax status of the owner and, to the greatest extent possible, in the treatment of portfolios held by commingled funds.
Service providers must have a reliable, comprehensive source of information on withholding tax rates which are expected to be applied and the reduced tax rates available according to the owner's tax status and other prevailing conditions. This information should be maintained in a comprehensive "tax rate table". A service provider may rely on an external source for this data or may use a combination of their sub-custodian network, reference to tax treaties by qualified personnel and information from external tax advisors worldwide. Either way, information should be matched across two independent sources.
For each forthcoming income event, the client's holdings must be matched to the tax rate table to determine what tax relief is due. Where available, a pre-filing process should be performed in readiness for tax relief to be collected "at source" at the time the income is paid. In other circumstances, a claim for refund of excess tax withheld should be generated, submitted in the most effective manner to the appropriate tax refund office and a receipt obtained wherever practicable. The "tax refund office" would usually be one or more departments in the issuing country's tax administration. Under local law or practice, it may be the sub-custodian (eg. where local law requires or allows the sub-custodian to be responsible for withholding of tax on the income and for repayment of excess tax withheld). A service provider may delegate the reclaim process to its sub-custodians: in these circumstances, additional controls should be in place to ensure that this does not detract from the range of available tax relief at source arrangements and from timeliness in the tax reclaim process.
For each reclaim process, a standard tax refund time frame should be established. Overdue items should be pursued promptly and effectively through to collection of refund monies. The status of tax reclaims must be reported to clients with clarity and timeliness, preferably in real time.
Any pattern of refunds falling beyond the corresponding standard time frame should be addressed in a timely manner by the service provider's management in conjunction with the respective sub-custodian or other relevant parties. The service provider should have in place a program of regular meetings with tax authorities to manage down the volume of refunds falling outside the standard refund time frame, to improve efficiency in the interface between service provider and tax authority and to reduce the standard time frame where practicable.
Tax Relief at Source
In many markets, service providers apply available mechanisms, or establish new ones, for collecting entitlements to tax relief at the time income is paid. This is termed "tax relief at source".
Contractual Tax Reclaims
A limited number of service providers offer "contractual tax". This is a cash management tool: the client's cash account is credited with entitlements to tax relief according to a pre-determined schedule of time frames, in place of when the tax refund monies are received. The contractual time frame may be n months after the income pay date (where the value of n varies according to the market concerned) or payment may be made, less a discount, with income payment. This can greatly assist clients in managing available funds.
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