As Morgan Stanley so aptly put it in their legendary advertising slogan, “You must pay taxes. But there’s no law that says you gotta leave a tip.” History doesn’t tell us whether the bank was specifically referring to tax refund claims – it presumably wasn’t – but its slogan would certainly be apropos precisely with regard to them: According to statistics from Switzerland’s Federal Tax Administration, Swiss taxpayers overpay around CHF 6 billion each year due to double taxation alone.
That’s not surprising. The task isn’t trivial. Even Nobel laureate physicist Albert Einstein is alleged to have said that it takes a philosopher to understand an income tax form – it’s too difficult for a mathematician.
Thinking about Taxes Right from the Start
The quote from Einstein would also be good for advertising purposes. But in the midst of increasingly complex and ever-changing tax regulations, what’s needed today isn’t philosophers, but rather a company like SIX, which is capable of delivering high-quality comprehensive financial information and providing supplemental advanced services that enable banks to comply with current international tax regulations and create added value for their clients. The only downside is that Einstein can no longer take advantage of this.
But let’s take it step by step: “To really gain an awareness of the problematics, you have to picture taxes like an automobile’s gasoline consumption,” says Jacob Gertel, Senior Content Manager Legal & Compliance Data at SIX. “It’s something that is constantly incurred and translates into an expense at the end of the journey, but that often goes forgotten when choosing the route at the outset.” The first step toward changing that would be to continually keep “tax consumption” in mind and to depict it in the data “because that’s the only way to professionally approach choosing a route or making investment decisions,” Gertel explains.
Currentness Is Key
The Valordata Feed (VDF) from SIX supplies information on over 27 million financial instruments. SIX continually updates that information, including tax information. “Belgium, for example, introduced a change in transaction tax rates for domestic investors practically overnight,” Gertel recounts. “The king affixed his signature to the amendment on December 25, 2017, and the new rates entered into force on January 1, 2018. We were able to reproduce that in our data from day one.” This up-to-dateness is of paramount importance to the primarily Swiss and other European banks that subscribe to the VDF because they ultimately are co-responsible for ensuring that their clients properly pay taxes on trillions of francs and euros worth of investment assets.
The tax information in the VDF has to be very thorough in its detail, Gertel explains: “Buying a US stock is not the same from a tax standpoint as investing in a US equity fund. Also, every country taxes stock-exchange transactions, dividends and even assets, for instance, differently. Let’s take Belgium again. Stocks there are taxed as wealth, as they are in Switzerland, but they aren’t in the USA.” It almost goes without saying that the taxes levied on shares, a structured product, or a bond can vary considerably even within the same country.
Recent years, moreover, have seen the addition of specific regulations such as the registration of foreign banks in the USA under FATCA, a tax on derivatives that use US stocks as their underlyings pursuant to IRS 871(m) and regulations on the automatic exchange of information (AEOI) under the Common Reporting Standard (CRS). With the data it supplies, SIX makes it easier for banks to meet those notification and reporting obligations, not just by flagging the affected financial instruments in the VDF, but also by flagging relevant corporate actions such as interest or dividend payouts.
AEOI and CRS
Governments around the world are trying to recover taxes that have been hidden from fiscal authorities through offshore accounts and investment vehicles. The Organisation for Economic Co-operation and Development (OECD) introduced an automatic exchange of information (AEOI) procedure in tax matters for this reason. Governments exchange data on bank clients with foreign tax domiciles annually under the Common Reporting Standard (CRS).
The Foreign Account Tax Compliance Act (FATCA) was enacted by the USA as part of a jobs stimulus bill. It is aimed at preventing US citizens from evading their taxes through the use of accounts with financial institutions outside the USA. Those foreign financial institutions are required to register with the US Internal Revenue Service, to identify clients who are US citizens and to disclose their accounts. Non-cooperation results in a withholding tax of 30%.
Section 871(m) of the US Internal Revenue Code has far-reaching consequences: Investors who own derivatives or structured products whose underlyings are based directly or indirectly on US stocks are likewise subject to tax and reporting obligations in certain instances.
Simplified Refund Claims
All that talk about regulations brings us back to the problem of tax refund claims. Many investors overpay taxes by not reclaiming the part of the foreign withholding tax they’re entitled to under double taxation treaties. That happens, for instance, not because they forget to file a refund claim – though that does occur now and then – but rather because a tax refund is simply impossible for a private investor to obtain in many cases. “Italian authorities are a perpetual issue,” says Michael Ripken, Head Post Trading at SIX. “Refund processing timeframes in Italy can still take up to 10 years. The Tax Reclaim service provided by SIX now enables banks to handle such complex tax refund claims even for private investors.” Ripken gives a fictitious example: “Mr. Odermatt, a Swiss taxpayer residing in Lucerne, holds a securities custody account at his local bank. His portfolio is widely diversified and includes mutual fund shares, stocks, and bonds from a variety of different countries.”
The data provided by SIX make it easier for banks to deduct taxes from their clients’ investment assets correctly and to comply with tax notification and reporting requirements.
The Tax Reclaim service from SIX enables banks to handle complex tax refund claims and thus boost returns for even private investors.
In the future, TaxCube from SIX will allow banks to factor tax elements into their investment advice to clients.
The example continues: With Mr. Odermatt’s consent, his bank sends the tax data to SIX, which evaluates the tax refund amount that Mr. Odermatt can reclaim. SIX then prepares all of the necessary forms and documents and sends them to the local tax authority in Lucerne. Once those papers are officially stamped and returned, SIX then forwards them to the foreign tax authorities. When SIX finally receives the tax re- fund amount, it remits it to Mr. Odermatt’s bank. He thus ultimately receives a refund of the overpaid withholding tax.
“This service meets a big need,” says Valerio Roncone, Head Product Management & Development in the business Unit Securities & Exchanges of SIX. The feedback from the market has accordingly been enthusiastic, he adds. “Raiffeisen was the pilot customer, but 10 new banks additionally climbed on board within months of the market launch. Others have shown definite interest: We are currently evaluating 40 banks.”
Many banks already provided tax refund services for their clients. But since they had to do much of that work manually, it was worthwhile only when large asset holdings were involved. Moreover, they sometimes lacked the necessary know-how, particularly in dealing with complicated foreign tax regulations.
SIX has automated many steps of the process with its Tax Reclaim service. This reduces banks’ expenditures of time and resources and boosts private investors’ returns. “But we at SIX do not maintain a business relationship with private investors,” Michael Ripken emphasizes. “Our aim is to help banks improve their own offerings.”
The project TaxCube from SIX is even younger than its Tax Reclaim service – it just finished its pilot phase, in which three different large banks participated. “We want to help banks incorporate tax elements into investment decisions right from the outset in the interests of their clients,” says Janine Hofer-Wittwer, Senior Product Manager in the business unit Financial Information of SIX, and the initiator of TaxCube.
She previously worked at a large bank herself and recognized the need for such a service. There were countries, for example, that tax dividends more heavily than capital gains, she notes. “In such places, a stock that delivers a small earnings payout can actually be more attractive than it seems at first glance. If the share price rises, the resulting capital gain has less of a tax impact.” She fed her idea into InnoHub, the internal innovation program of SIX that is open to all employees, and is now guiding the project through to market maturity.
TaxCube will be a data feed that banks can integrate into their investment advisory services to differentiate themselves from competitors. “It enables them to hand their clients an analysis that delivers an all-inclusive depiction of the expected performance after taxes,” Hofer-Wittwer explains. And isn’t what’s left over in the end really the most important question in all tax matters? Regardless of leaving a tip or not.