Tax is a product not a task

Hello, and welcome. My name is Ross McGill, and this is a short presentation about tax and how it should be treated as a product and not a task in the custody world.

I'm going to give you the frame of reference first. The client in this instance in late 2014, early 2015 was a Tier 2 European custody bank. They covered 30 markets for their clients, and they did that using a managed counterparty network of subcustodians. Their tax processing model was quite typical of most second tier custody banks. They used third-party tax software that they bought from someone else. They have an in-house staff. This one had 15. Those staff were covering relief at source, quick refund, and long form claims in those 30 markets. The net result was that they were filing about 20,000 tax reclaims, but they only did that once a year. And they only do tax reclaims for clients who specifically ask for that service. So when we were approached by this bank, the purpose of the case study was to assess the value of whether outsourcing would work for them or not, and if so, what benefits it might bring.

Now, they exist in a tax environment around the world which is very complicated. It's getting more complicated as well every year. There are currently 5,700 double-tax treaties between pairs of countries. And that number is growing by about 200 every year. There are new kinds of investment vehicles, new kinds of investment structures that clients are putting together, and many of these have tax implications. When they file tax reclaims, tax authorities are also becoming more inquisitive. You only have to look at the kinds of situations that have occurred with Denmark in recent times. And other tax authorities are getting extremely concerned when large claims are filed to make sure that the claims represent true investment. At the other end of the scale, clients are becoming much more aware of withholding tax. As a result, they're becoming more demanding and their portfolios are becoming wider and deeper in an increasingly volatile investment market. So the custodial DIY model has a number of weaknesses, which we were asked to look at.