Withholding Tax Recovery on Cross Border Investment Income: A Compliance and Corporate Governance...

Withholding Tax Recovery on Cross Border Investment Income:

A Compliance and Corporate Governance Issue

FIRMA National Risk Management Training ConferenceThe Fiduciary & Investment Risk Management Association, Inc

April 9, 2008Orlando, Florida

© 2008 GlobeTax Services Inc.

Globe Tax Services, Inc., and GlobeTax Data Services, Inc. (collectively “GlobeTax”) do not provide or offer tax, investment or legal advice and nothing provided in this presentation is intended to constitute the provision thereof. GlobeTax does not assume any, and disclaims all liability

that may arise from reliance on, changes to, errors in, or omissions in the materials presented. Please note that this presentation is the exclusive and copyrighted property of Globe Tax Services, Inc. and only for viewing by the registered attendee. No redistribution rights are

granted for the content of this presentation in whole or in part.

Martin S. FoontPresident & CEO

William D. TreutVice President-Marketing


Agenda

• The Withholding Tax Concept• Cross-Border Investment Growth• The Investment Chain• Investor Perceptions of Treatment• The Tax Reclaim Process• The Financial Opportunity• Regulatory Guidance• Shareholder Concerns• Responsibilities: Issuers and Intermediaries• Solutions: Best Practices• Sound Corporate Governance Policies• Q&A


The Withholding Tax Concept


GrossIncome

NetIncomeafter tax

WithheldTax

TaxAuthority

NetIncome

after tax reclaim

0

1,000

2,000

3,000

4,000

5,000

6,00019

80

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Q3

Level (US$ billions)

-20

0

20

40

60

80

100

120

140

160

Net Flows (US$ billions)

Levels (US$ billions)

Net Flows (US$ billions)

Reference Line

Source: The Federal Reserve, Flow of Fund Accounts of the United States, December 2007

• Total investment levels have risen from $279 billion in 1991 to a record $4.9 trillion in 3Q2007

• U.S. investor inflows to non-U.S. equities have been positive in every year since 1980, with the sole exception of 1987, despite declines in asset values from 2000 - 2002.

U.S. Investment in Non-U.S. Equities


• Cross border investment is increasing by 16% per year

• Funds historically hold 25%-35% of assets cross border

• Increasingly funds are being advised to invest up to 50% cross border to mitigate volatility and maximize yield

© 2008 Globe Tax Services Inc.

An Increasing Issue


The Investment Chain

Issuers

Custodians & Agent BanksBrokersFund OrganizationsTrusteesAuditorsInvestment Advisers

Investors

GrossDividendDeclared

Investor 1Net

IncomeAfter Tax

Investor 2Net

IncomeAfter Tax

What the Company intended

What was delivered

Two investors of different residency and legal status with the SAME investment

Why did Investor 1 get more than me?

Who knew?

What can be done about it?


Investor Perceptions

GrossDividendDeclared

Investor 1Net

IncomeAfter Tax

Investor 2Net

IncomeAfter Tax

What the Company intended

What was delivered

Two investors of different residency and legal status with the SAME investment

Why did Investor 1 get more than me?

Who knew?

What can be done about it?

Tax Reclaim


Investor Perceptions

BO Structure

Statutes of Limitations

Residency StatusResidency Status

Type of Jurisdiction

Markets

ProcessesProcesses

FormsForms

VariationsVariations

Year of Income

Recovery Time

Income Type

Regulation

BO Tax Status

Moving Parts


The Scale


Assets under management

Average proportion cross border

Average long term yield

Annual average entitlement (Withholding rate-Treaty rate)

Extant TaxInc. average Statute of Limitations

Assets under management

Average proportion cross border

Average long term yield

Annual average entitlement (Withholding rate-Treaty rate)

Extant TaxInc. average Statute of Limitations

4.5%

15 %

5.2 yrs

$96.5Tn

$32.4Tn

$1.46Tn

$219Bn

$1.14Tn

Global Custody

(33.6%)

globalcustody.net

Reclaimed7%

Unreclaimed93%

© 2008 Globe Tax Services Inc.

The Opportunity

OECD Corporate Governance Guidelines

• Ensure equitable treatment of all shareholders (including minority and foreign holders). – “Within any share class, all shares

should carry the same rights. All investors should be able to obtain information about the rights attached to all series and classes of shares before they purchase.”


OECD Corporate Governance Guidelines

“Basic shareholder rights should include the right to:

1. Secure methods of ownership registration

2. Convey or transfer shares

3. Obtain relevant and material information about the corporation on a timely and regular basis

4. Participate and vote in shareholder meetings

5. Elect and remove members of the board

6. Share in the profits of the corporation.”


Basel II Corporate Governance Guidelines

Duties to Shareholders and Bank Customers:

– “Meet the obligation of accountability to their shareholders and take into account the interests of other recognized stakeholders.”

– Protect the interests of bank customers

• Transparency • Information


Shareholder Concerns

• Know they are receiving a lower dividend

• Little or no knowledge of foreign tax laws

• Ignorance of Statutes of Limitations

• Importance of full disclosure by issuers and intermediaries

• Current examples of Best Practice


Responsibilities:Issuers and Intermediaries

• Manage shareholder expectations through effective communication

• Maximize share value and maintain investment flows

• Distribute dividend value to which shareholders are entitled

• Understand recovery processes and reveal them to investors


Summary

• Over $200 billion of tax withheld annually

• Rising trend of amounts withheld as cross-border investment grows

• Current tax recovery negligible• Failure to address these issues

exposes issuers and intermediaries to both reputational and financial risk

• Complexity of the issue does not justify inaction


Solutions: Best Practices

• Issuers: Need to develop effective corporate governance policies that support their investor relations strategies– Shareholder communication– Shareholder education

• Intermediaries: Need to adopt tax recovery processes to ensure investor access to legal entitlements and accompanying enhanced investment yields


Policies on Tax Recovery

• Ensure full compliance• Foster satisfaction• Improve reputation • Enhance return on investment• Attract and keep investors/clients


Profile: GlobeTax

• Founded: 1992• 4,500 clients worldwide (38 countries) • Outsource service provider for all DR Depositaries

(JPMorgan Chase, BNY Mellon, Citi, and Deutsche Bank)• Processes reclaims for all DTCC participants filing claims

for ADRs and NY Registry Shares (NYRSs)• Processes reclaims for ADRs, NYRSs and ordinary shares in

all 27 jurisdictions worldwide permitting recovery of excess taxes withheld

• Research: 230+ jurisdictions• Volumes Processed: 1,700,000+ reclaims per year

© 2008 Globe Tax Services IncCONFIDENTIAL

Q & A


USA:Len A. Lipton – VP, Marketing [email protected]

William Treut – VP, Marketing [email protected]

Telephone: (212) 747-9100

ROW:Ross K. McGill – Director, [email protected]

Telephone: + 44 207 268 3962

The world’s pre-eminent withholding tax recovery and market data specialists

GlobeTax.com © 2008 Globe Tax Services Inc

Contact Information

mailto:[email protected]

Withholding Tax Recovery on Cross Border Investment Income: A Compliance and Corporate Governance...

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