Global investment losses from unclaimed withholding tax hits £13.2 billion

UK investors relinquish more than £680 million in rightful returns due to withholding tax

Research has revealed that an estimated £13.2bn ($22.4bn) of investors’ rightful returns from foreign shares and bonds were lost in the latest financial year because Witholding Tax (WHT) on dividends and income is not being reclaimed.

This represents an increase of nearly 30% in the annual amount lost since 2011. UK investors chalked up the second highest losses, at £680m ($1.15bn), just behind the US who forfeited £1.63bn ($2.77bn).

The research comes from from global withholding tax (WHT) and class action services specialist, Goal Group. It found that reclamation rates on WHT have seen a marginal improvement since it last examined the situation in 2011, with just under 24% now being left unclaimed. However, major increases in market capitalisation and dividend distribution since the last Goal Group study has meant that worldwide unclaimed WHT has seen a substantial net increase.

Methodology

Goal Group combined its own proprietary information on withholding tax reclamation rates with a wide range of global sources on foreign portfolio investment and dividend payments in different markets around the world.  This data was then used, along with up-to-date evidence on the complex picture of withholding/reclaimable rates by country, to calculate actual sums left unclaimed, both globally, and for individual countries with the larger investor communities.

Trends

The report states that not only are equities back in fashion, but interest in cross-border investing is also on the rise. According to the statistics from the International Monetary Fund and from global stock exchanges, the market capitalisation of global equities rose 81% between 2003 and 2012. Over the same period, the value of cross border equities investments rose by 141%.

Goal pointed out that the 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 maximise returns compulsory clauses within the contracts they hold with investors.

Vicky Dean, sales & relationship manager EMEA, Tax Reclamation, Goal Group, commented: “As the global economy continues to recover, investors are increasingly adopting an international investment strategy to maximise their earnings from securities. 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.”

“All those in the fund management community should take the issue seriously and make every endeavour to enhance investors’ returns. A number of leading custodians have already recognised the market opening and effectively utilised tax recovery services, both for their clients and as an interbank services opportunity.  However 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.”