GlobeTax - Probity Angle

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Probity Angle

When a board of directors submits a resolution to an Annual General Meeting for the distribution of a dividend, there is a reasonable expectation by all the shareholders that they will receive the value that the company intended them to receive. Yet, in reality this all too often does not occur.

Rapidly increasing volumes of cross border share ownership is creating a two-class community of shareholders from the corporate perspective, resident and non-resident, which is likely to affect long-term cross border investment strategies of institutional investors. Due to over-taxation at the point of distribution and failure by many in the investment chain to deal with the issue effectively, the latter may ultimately receive up to 35% less value from a corporate dividend than that to which they are entitled and which the board of directors intended that they receive.

While companies are not legally responsible for the tax affairs of their shareholders, they are responsible for maximizing share value and fundamentally interested in attracting and maintaining investment. This requires transparency and best practice as supported by Sarbanes-Oxley in the USA, Higgs in the UK and other governance frameworks in development across Europe. Their ability to attract investment is thus closely linked not just to their performance as a business, but increasingly their performance towards their shareholder's interests. It is therefore in the best interests of companies with cross border shareholders to adopt transparent, shareholder friendly policies to encourage investment.

The withholding tax industry is highly fragmented in its knowledge, application and consistency in the support of shareholders. Shareholders should place pressure on boards of directors, through the application of corporate governance policies and voting, to require such boards to:

Know about the effect of withholding tax as it pertains to their non resident shareholder base,
Facilitate the education of their shareholders about the material effects of their decision to invest in the company and
Provide access to solutions which can mitigate any loss in return on investment that would otherwise occur.