GlobeTax - Outsourcing

Outsourcing

Many, but not all, financial intermediaries provide tax reclamation services to their clients. However, in an increasingly competitive custody market where tax is receiving much more attention from investors, custodians face real challenges. Not the least of these is how to offer a premium service in withholding tax for a wide range of client types and residencies, who invest in both mature and emerging markets. Unless processing significant volumes of reclaims, it is often just not cost effective to engage in the expenses of research and manual processing. So custodians and brokers often either do not provide a service at all, or they provide a service with limitations. Those limitations will depend on the custodian's own circumstances and market strategy, but often, limitations can include a threshold reclaim value below which no action is taken or a refusal to file reclaims for complex client types or clients in specific structures e.g. hedge funds.

Even with a reclaim function in place, custodians face the problem that costs are incurred up front in staff costs, space and equipment costs irrespective of the volume of reclaims. So withholding tax services represent a complex area where it is difficult to justify a full service offering and even when justified, the fixed investment costs are significant.

However, there is a solution which many custodians are turning to outsourcing.

For those not currently offering any service, competitive pressure is turning many to outsourcing as a method to "switch on" a fully operational function at virtually nil cost and thus immediately be "in the game". For those with a reclaim function already, the increasing costs of compliance, investor awareness and competitive pressure are revealing departments that are not easily scalable and that are having increasing difficulty meeting the challenge of changing tax processes and the requirements by foreign tax authorities for more information. The need here for custodians is to recognize the opportunity that outsourcing represents. At almost the flick of a switch, a fixed cost function can be transformed into a variable cost function whose costs reflect directly the volumes processed. Buying into a service that is already the largest global filer of reclaims, also means that custodians can immediately benefit from improved performance benchmarks.

To Download the Outsourcing Fact Sheet, please click here.