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How can investors recoup foreign withholding tax?

As much as 20% could be recovered on their dividends and interest payments


Foreign withholding tax (WHT) is often ignored when investing abroad, yet the up-to 35% WHT on cross-border dividend and interest payments can have a material impact on investor portfolios.

Dividend and interest yields are commonly considered variables when it comes to investment analysis, but very few are talking about after-tax returns, or even looking at recovering missed value from foreign tax offices, write Byron Roberts, head of private wealth, and Benjamin Osborne-Young, business development manager for private wealth, at WTax.

Investment managers and investors should be asking whether tax value can be recovered and what impact these recoveries have, on overall performance returns.

When an investor in one country – such as the UK – receives a dividend from another country – for instance Switzerland – a portion of the dividend is withheld by the Swiss tax authorities, 35% to be exact. A network of double tax treaties, designed to encourage international investment, would allow a UK-domiciled investor to reclaim 20% of the tax withheld on the dividend – which means the 35% tax is reduced to 15%.

This would up the net dividend yield by 0.5% . If a decision to increase returns by 50bps was available, everyone would jump at the opportunity, especially when the possibility exists to recover up to five years retrospectively in some countries – but what is holding investors back?

Complex procedure

Material reclaimable WHT value goes unrecovered each year due to numerous factors, including the scale and processing power that is required to submit smaller value claims.

To compile and submit a successful WHT claim, information and documentation needs to be sourced from the investor, custodians, sub-custodians, and the investor’s local tax office.

In addition, most tax offices are still paper-based and may require submissions to be made in their local language. Even once claims are successfully made, there are further hurdles to address, such as dealing with queries from tax offices as well as tracking and accounting for recoveries when repayment dates are uncertain. All of this culminates to create a situation where WHT is not pursued and eventually expires.

To complicate matters, many investors believe that reclaiming WHT will be addressed by one of the existing providers in the payment chain, not realising that comprehensive recoveries do not always take place. Without a conscious effort to recover missed value, investors will continue to dilute their investment returns unnecessarily.

The impact of WHT is amplified when invested in higher dividend and interest yielding stocks and bonds.

While the recovery of WHT might not be at the top of the agenda when it comes to the investment decision making process, it should certainly be a core consideration – there is no reason to give away yield to tax offices around the world, when there are statutes in place and reclaim specialists available, to benefit both investors and investment managers.

This article was written for International Adviser by Byron Roberts, head of private wealth, and Benjamin Osborne-Young, business development manager for private wealth, at WTax.


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