US$22.4 billion of investors’ rightful returns from foreign shares and bonds were lost in the latest financial year because withholding tax (WHT) on dividends and income is not being reclaimed, new research from Goal Group reveals.
This represents an increase of nearly 30% in the annual amount lost since 2011. Japan chalked up the fourth highest losses at $964 million, behind the U.S. ($2.77 billion), the U.K. ($1.15 billion) and Luxembourg ($968 million).
Reclamation rates on WHT have seen a marginal improvement since Goal Group last examined the situation in 2011, with just under 24% now being left unclaimed.
However, major increases in market capitalization and dividend distribution since the last Goal Group study has meant that worldwide unclaimed WHT has seen a substantial net increase.
Cross-border investing and equities are on the rise
According to the statistics from the International Monetary Fund and from global stock exchanges, the market capitalization of global equities investments rose 81% between 2003 and 2012 and the value of cross border equities investments rose 141%, over the same period.
This rising proportion of portfolio investment devoted to foreign securities means that the lack of tax recovery needs urgent attention from fund managers and custodians.
Investors are becoming increasingly rigorous in their scrutiny of investments and are putting pressure on fund managers to provide greater transparency. In fact, some fund managers are even making this fiduciary duty to maximize returns compulsory clauses within the contracts they hold with investors.
“As the global economy continues to recover, investors are increasingly adopting an international investment strategy to maximize their earnings from securities," comments Jonathan Hu, Director of Sales & Relationship Management APAC, Goal Group.
In all events, these cross-border shares are subject to a tax on returns that is deducted at the source.
Although a proportion of this is available to be recovered, a substantial amount is still being languished in foreign tax regimes as the reclamation of WHT is not treated with the due attention it deserves.
Hu notes that with 24% of recoverable WHT lying unclaimed in foreign tax systems every year, there is still a clear opportunity for custodians to increase the scope and efficiency of reclamation services.
The report also reveals that tax recuperation rates, rules and timings vary widely around the globe, making the retrieval method complex. However, technology solutions are now more widely available to automate the process, making it a profitable procedure for custodians and fund managers under pressure from their investor clients.