Removing the risk from tax rate determination

Removing the risk from tax rate determination

Our previous tax operations transformation installment considered how you can remove the pain from tax reclaim. This fourth article discusses ways you can remove the risk from tax rate determination.

There is intense pressure on financial intermediaries to ensure utmost accuracy when applying tax rates to income distributions. It is a burden intensified by the fact that tax rates must be based on individual customer profiles and the asset types in which they invest.

Ultimately, it means the process of determining tax rates is fraught with risks, especially when performed manually. Typically, asset servicing providers store tax rate information on multiple systems, heightening the risk of inconsistencies and of applying the wrong or outdated tax rates to end customers.

Ending the era of assumption 

The application of correct tax rates to specific income distributions requires multiple documents to be interrogated. Where time constraints and customer expectations create a build-up of pressure, it is common to lose sight of which documents are valid for each customer. Should this occur, financial intermediaries are left with no option but to assume what those rates are.

Our tax rate determination module eliminates this threat by intervening in each distribution process and automatically applying the correct tax rate calculations. Ending assumed tax rate distribution with automated and accurate tax rate determination prevents a host of downstream problems that can damage customer experiences and lead to internal losses.

The cost of assumed tax rates

Ensuring accuracy and avoiding breaks is critical to the tax rate determination process. For example, if a financial intermediary assumes a customer has sent a specific document when they haven't, any income paid to the customer must be reversed with a higher rate of tax reapplied. The impact of income reversals on customer experience can be severe.

Such errors can also filter downstream, disrupting the workflows of other key players, such as pension fund accountants whose attempts at calculating a fund's net asset value are stalled by inaccurate tax rates. Aside from delays that damage customer experience, the cost of rectifying these errors transfers to you.

Replacing confusion with order

Adding to the impact of inaccurate tax rate determination is the confusion that often arises on the asset services side between corporate action and tax teams when a customer raises a tax rate query. An exception management process unfolds where separate entities begin questioning each other on the correct tax rate to use. In the uncertainty, mistakes are invariably discovered, such as vital documents not being sent to customers.

By automating tax rate determination, our module halts assumed tax rate distribution and the associated downstream problems from the start. It also provides additional crucial data, such as the protocols needed for overseas investments, and ensures that data is accessible throughout the platform.

A multitude of use cases 

This article has focused on our tax rate determination module’s ability to provide accurate tax rates for income distribution. However, it offers much more.

For example, with stock lending/stock borrow trades, the module automatically examines factors such as investor country of residency, the type of investment and the investment country. From here, the counterparty’s withholding tax rate on income payments - and thus the trade’s profitability - can be accurately determined.

Similarly, as the module can interact with customer portals, it will automatically respond to customer queries on matters such as withholding tax rate eligibility or identify which tax documents must be provided for investments in certain countries.

The module can even be used to calculate projections of fund accounting net entitlements. By automatically reconciling global custody and fund accounting records, accruals can be maintained and aligned. If an opportunity is then identified, the module can create the relevant tax reclaim accruals prior to payment.

Looking ahead: In our next article, we demonstrate how our unique module helps financial intermediaries navigate the US tax system labyrinth at each year end to report in a timely and accurate way. 

Not seen our earlier articles on tax document management, relief at source and tax reclaims? Discover them here.