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Withholding Tax Recovery on Cross Border Investment Income: A Compliance and Corporate Governance Issue FIRMA National Risk Management Training Conference The Fiduciary & Investment Risk Management Association, Inc April 9, 2008 Orlando, 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. Foont President & CEO William D. Treut Vice President-Marketing © 2008 GlobeTax Services Inc.
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 © 2008 GlobeTax Services Inc.
The Withholding Tax Concept © 2008 GlobeTax Services Inc. Gross Income Net Income after tax Withheld Tax Authority Net Income after tax reclaim
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 U.S. Investment in Non-U.S. Equities © 2008 GlobeTax Services Inc.
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
© 2008 GlobeTax Services Inc. The Investment Chain Issuers Custodians & Agent Banks Brokers Fund Organizations Trustees Auditors Investment Advisers Investors
Gross Dividend Declared Investor 1 Net Income After Tax Investor 2 Net Income After 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? © 2008 GlobeTax Services Inc. Investor Perceptions
Gross Dividend Declared Investor 1 Net Income After Tax Investor 2 Net Income After 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 © 2008 GlobeTax Services Inc. Investor Perceptions
BO Structure Statutes of Limitations Residency Status Type of Jurisdiction Markets Processes Forms Variations Year of Income Recovery Time Income Type Regulation BO Tax Status Moving Parts © 2008 GlobeTax Services Inc.
The Scale © 2008 GlobeTax Services Inc. Assets under management Average proportion cross border Average long term yield Annual average entitlement (Withholding rate-Treaty rate) Extant Tax Inc. average Statute of Limitations Assets under management Average proportion cross border Average long term yield Annual average entitlement (Withholding rate-Treaty rate) Extant Tax Inc. 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
© 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.” © 2008 GlobeTax Services Inc.
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.” © 2008 GlobeTax Services Inc.
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 © 2008 GlobeTax Services Inc.
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 © 2008 GlobeTax Services Inc.
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 © 2008 GlobeTax Services Inc.
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 © 2008 GlobeTax Services Inc.
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 © 2008 GlobeTax Services Inc.
Policies on Tax Recovery Ensure full compliance Foster satisfaction Improve reputation Enhance return on investment Attract and keep investors/clients © 2008 GlobeTax Services Inc.
Profile: GlobeTax Founded: ,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 Inc CONFIDENTIAL
Q & A © 2008 GlobeTax Services Inc.
USA: Len A. Lipton – VP, Marketing William Treut – VP, Marketing Telephone: (212) ROW: Ross K. McGill – Director, Marketing Telephone: The world’s pre-eminent withholding tax recovery and market data specialists GlobeTax.com © 2008 Globe Tax Services Inc Contact Information
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