With the current investment rate environment being what it is—low—fund managers and management companies are looking for more stability and better returns. However, for many, this is proving difficult. The complexity of fund structures means that it could be easy to overlook certain processes that could be improved—where should you even begin? In my industry experience I have seen a recurring area that fund managers should be thinking about: withholding tax.
What I've seen is that sub-custodians, which are often part of bigger groups, tend to minimise their own risk of liability towards tax authorities by, when in doubt, levying more rather than less tax. This strategy makes perfect sense because nobody wants to be the weakest chain in the group by incurring tax penalties by local governments. Administrators and custodians, for their part, typically have time to cover some tax reclaims and relief at source but often not the entire range of investment markets. The tax paid, thus, is sometimes higher than it needs to be.
Unlike individuals and companies, investment funds are exempt from corporate income tax in Luxembourg, which means that no credit or reimbursement possibilities exist on the Grand Duchy's side. This means that the WHT constitutes a final cost, which is why it's an important place if you're looking to improve the performance of your fund.
For example
Tax is a final cost if it isn't dealt with properly, i.e. if no appropriate measures are put in place by the fund or the management company. For instance, we have a client whose reclaimed withholding taxes for one of their sub-funds represented a performance increase of 55bps on the NAV at the end of the financial year.
Correct WHT payment could mean a better overall performance
More than 99 countries levy withholding taxes, at varying percentages and with different laws, resulting in many complex legal environments for funds to navigate. Overpaying WHT would upset investors, whereas underpaying would create risks with local jurisdictions.
The way the network of intermediaries is structured means that in-house solutions tend to be best. This is where KPMG would be able to lend a hand: we've developed a fully-automated tool, a "withholding tax health check" if you will. Our worldwide network of firms monitors changes and complexities in withholding tax in 126 countries. Far beyond a simple tax matrix, our product is automated and customised to fit your needs—you can easily discover your situation, and, if you like, outsource your entire tax recovery process to us.
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