A finance leaders’ guide to smart tax management

The asset management industry is under increasing pressure as investors look to minimize their own costs, while compliance costs and regulation grow.

The squeezed middle

Asset managers find themselves squeezed between two external pressures – the need to maximise returns, for which accelerating repayment of tax reclaims can help, and the ever-increasing scope of regulation and tax authority scrutiny. In the squeezed middle, businesses must decide where to deploy their own limited resources, and free up their best people to focus on growth whilst ensuring the asset managers and third-party service providers meet all tax and regulatory obligations, related to the funds and investments.

“Asset managers of all sizes may not be able to unlock the global resources needed to maximise efficiencies and contain costs in areas such as reclaiming withholding tax (WHT) or meeting tax and regulatory reporting obligations,” says Peter Grant, a tax partner specialising in operational tax at KPMG in the UK, adding that “we believe that all asset managers can benefit from the economies of scale of working with a partner to manage operational tax challenges globally”.

Many countries around the world, including most EU member states, apply WHT where interest or dividends are paid to an investor resident in another country.

Grant adds: “To avoid double taxation, governments often sign double taxation treaties, which help avoid the same individual or company being taxed twice. These treaties allow a cross-border investor to submit a refund claim for any excess tax paid in another country.”

The European Commission admits that refund procedures across European countries “are often lengthy, costly and cumbersome, causing frustration for investors and discouraging cross-border investment within and into the EU.” The withholding tax procedures applied across the EU diverge significantly. The European Commission says investors must deal with more than 450 different forms, many of which are only available in national languages. The Cum/Ex and Cum/Cum scandals have also shown how refund procedures can be abused: the tax losses from these practices have been estimated at €150bn for the years 2000-2020, according to the Commission.

The bureaucratic hurdles are also costly. In 2022, the overall cost of WHT refund procedures within the EU was estimated at €6.62bn per year by the Joint Research Centre (JRC).

In May 2024, the EU finalised measures known as faster and safer tax excess relief (FASTER) to try and simplify the reclaim process and reduce the costs involved. The proposals include:

• A common EU digital tax residence certificate, which the Commission says will make withholding tax relief procedures more efficient. Investors with a diversified portfolio in the EU will need only one digital tax residence certificate to reclaim several refunds during the same calendar year. The digital tax residence certificate should be issued within one working day after the submission of a request. At present, most member states still rely on paper-based procedures.
• Two fast-track procedures complementing the existing standard refund procedure: a “relief at source” procedure and a “quick refund” system, which will make the relief process faster and more harmonised across the EU, according to the Commission. Member states will be able to choose which one to use – including a combination of both.

The Commission estimates these standardised procedures will save investors around €5.17bn per year. However, the proposals are not due to come into effect until 2030.

Growing regulatory burden

While the EU proposals should help simplify reclaim procedures, the overall regulatory and tax burden on asset managers continues to rise. There are frequent updates and modifications to the regulatory landscape surrounding withholding tax. The authorities everywhere are also introducing new treaties, regulations, and rules, aiming to enhance tax compliance and prevent tax evasion, that often require asset managers to report the financial transactions of their customers, investors, and policy holders.

David Wren, another operational tax partner at KPMG in the UK, says: “Reclaiming withholding taxes will positively impact the investment return of the investors by recovering cash paid in excess to tax authorities.”

He adds: “Money that is not reclaimed quickly also presents an opportunity cost to asset managers and reclaims in some countries can take a long time to process.”

These are important considerations given the increasingly competitive nature of the market.

The dividend and tax reclaim payment chain is often highly intermediated: the investor may appoint a bank to act as global custodian, who in turn will use a local sub-custodian (potentially a third-party bank) and this bank might interface with local paying agents, tax authorities and a central securities depositary. Information as well as physical paper forms typically need to flow between these intermediaries, often in very short timeframes, to enable a withholding tax reclaim or relief at source payment to be made.

Nathan Hall, also a partner and head of asset management tax at KPMG in the UK, says: “The preference of investors and service providers will always be to obtain relief at source as this provides improved cash flow.” However, Hall adds that “not every country makes this available and some that do, impose onerous requirements which can make it very challenging to achieve.”

In addition, while global custodians perform well, they might not always offer a service in the more complex markets and may be unaware of a vital requirement. Moreover, all claims have a statute of limitation, beyond which an opportunity to reclaim tax, for example, will be lost. That can affect a fund’s performance and its appeal to investors, while tax that is not reclaimed is also money that cannot potentially be reinvested with an asset manager, so undermining revenues.

Increasingly, asset managers are seeking third-party expertise to help, either from specialist reclaim providers as well as tax advisers with global capability and expertise. These providers can help investors in complex markets or with specialist assets where custodians or pure reclaim providers might not always offer a comprehensive service Hall says: “Investors aren’t always fully aware of the areas where service providers do or don’t support tax relief services, often down to highly complex market requirements, assets with non-standard tax treatment, or where a provider is simply not able to act for the beneficial owner.”

This situation can lead to a mismatch of understanding of service scope and if investors are not fully informed, it can leave available tax relief unclaimed.

The right partner

Working with KPMG can help asset managers to develop a long-term strategy for managing the costs of compliance and improving the efficiency of tax reclaims.

In the short term, access to technology and expertise can help asset managers identify missed opportunities for reclaims, track developments across global markets and to establish a one stop shop for advice, reclaims and monitoring.

In the longer term, working with a partner can help to offset the cost of managing complex regulatory change such as FASTER. Change management is often challenging, not just in terms of cost but also in resources and senior time needed to oversee change.

KPMG are committed to supporting clients with FASTER and wider industry change across their solutions - supporting clients with monitoring and tracking change, reacting to enhanced requirements, managing tax authority engagement, and maintaining overall governance and control.

Tax authorities across the globe have conscripted asset managers and other Financial Institutions to help them in their battle against tax evasion. Given the pressures on government finances, that battle is likely to intensify, so asset managers need to be aware of their responsibilities and how they can best meet them.

The automatic exchange of information (AEOI) requires asset managers and other financial intermediaries to declare the tax residence of their clients in more than 120 countries that have signed up to the regulation. AEOI is governed by the Foreign Account Tax Compliance Act, a US federal law passed in 2010 and implemented across 113 jurisdictions through inter-governmental agreements and the Common Reporting Standard (CRS) approved by the Organisation for economic cooperation and development (OECD) Council on 15 July 2014.

AEOI is aimed at reducing global tax evasion and increasing tax transparency. It clearly places a large administrative burden on asset managers, requiring them to update onboarding processes, collect additional information on investors, and develop robust reporting procedures. Asset managers must comply with AEOI requirements and ensure that they are collecting and reporting the required information accurately and in a timely manner. Failure to comply with AEOI requirements can result in significant financial penalties and damage to the asset manager’s reputation.

Therefore, it is important for asset managers to have robust AEOI compliance programmes in place, argues Nathan Hall, a partner and head of asset management tax at KPMG in the UK. He adds this “may include procedures for identifying reportable accounts, establishing due-diligence procedures, and implementing systems for collecting and reporting the required information to the relevant tax authorities.”

An evolving regulatory landscape

Asset managers must keep abreast of changes to the AEOI. In 2022, for example, following a review of the measures, the OECD unveiled amendments to the CRS, along with the crypto-asset reporting framework (CARF), a new AEOI specifically for virtual assets.

The amendments resulted in a substantial increase in the amount of information to be reported for every customer relationship and created an even heavier burden for asset managers. They also required substantial changes to reporting systems, since much of the data now required by the authorities is not available in the stipulated form.

“For example, the crypto digital token reporting that asset managers will soon be required to complete is oriented around transactions, whereas the reporting currently undertaken tends to focus on a point in time,” says David Wren, a partner specialising in operational tax at KPMG in the UK. The new requirements thus compound the complexity of the current legislation and add to the volume of information required by the authorities from asset managers.

The hunt for powerful data

“Tax authorities around the world are also striving to capture more and better-quality data from financial institutions and are applying ever more sophisticated ways of interrogating the data they receive,” says Peter Grant, operational tax partner at KPMG in the UK. For instance, from the reporting year 2023 onwards, asset managers are required to obtain taxpayer identification numbers (TINs) for all reportable US account holders. They must provide an explanation if they fail to do so.

Moreover, there are notable differences between jurisdictions in the annual FATCA and CRS reporting, adds Grant. “Some, such as the UK, will accept combined AEOI reports, while others, such as Luxembourg, require separate FATCA and CRS files. Asset managers must balance demands from tax authorities with the increasing complexity of data privacy rules and client concerns about divulging what is often highly sensitive personal data,” he says.

The way the authorities require information to be submitted also varies from one jurisdiction to another. Some tax authorities require prior registrations or notifications. These can take several days to process even before the reports can be submitted. Finally, submission of reports in an XML format is required in most cases, with some jurisdictions no longer accepting manual submissions. Despite the regimes now being well established, tax authorities have already instituted over 40 changes to date in 2024, all of which require asset managers to implement changes to systems or procedures.

Hall says this extra burden can result in huge pressures on asset managers, particularly small to medium-sized operators that don’t have the resources of the very large firms. “The ongoing battle for talent means that businesses need to deploy their people towards the most important tasks – focused on customer and growth. Outsourcing compliance functions can free up your best and brightest to focus on core capabilities” he says. The resources that asset managers can devote to this year-round challenge also vary, since demand pressures fluctuate over the course of the year.

The buck stops with the asset manager

Asset managers often outsource the management of these operational tax matters to third-party administrators, global custodians, and fund administrators. Sometimes, they retain the function in-house, with their own compliance teams. However, when they do outsource, they often need help managing the oversight of the outsourced providers. Effective oversight is vital given that ultimate responsibility for providing the information that the authorities demand, in the format in which they require it, is always the asset manager’s responsibility – and if there are any problems, they will be held to account.

It is clearly important to delegate responsibility for this issue to one or more individuals within the compliance department or appropriate oversight team. But given the myriad of requirements and the constantly changing nature of those requirements, asset managers still face significant challenges.
Utilising the tax technologies developed by multinational professional services firms, which have the knowledge, skills, and contacts in the multiple jurisdictions in which asset managers operate, can be the most efficient and cost-effective way of tackling the issue. These companies have developed sophisticated technologies with advanced data analytics, which can speedily process data and present it in the format required by a particular tax authority.

Grant says: “By anticipating likely requests for information, the use of these tax technologies can pre-empt wider enquiries by officials, which can tie up significant resources.” They can also help avoid possible reputational issues if, for example, the tax authorities start to contact clients directly. And, of course, by ensuring that asset managers exactly meet the demands placed upon them, the deployment of advanced tax technologies can help ensure asset managers are not faced with penalties, which can be significant and entail reputational damage.

Asset managers are under pressure from the tax authorities as never before, and that pressure is likely to continue increasing in the coming years. Governments, with their significant resources, can deploy all manner of tools as they strive to maximise tax revenues and finance ever-growing public spending. They are also investing heavily in data capabilities, developing data science teams, and deploying AI, using analytics. upskilling staff, probably more quickly than most in the private sector realise. KPMG’s cutting-edge tax technologies, specialist global knowledge, and highly skilled and experienced professionals can help level that playing field.

The challenges facing asset managers include an explosion in tax compliance obligations and greater scrutiny from tax authorities. Asset managers certainly hold huge amounts of valuable data about their clients, and the tax authorities are increasingly adept at analysing that information, identifying any discrepancies, and demanding explanations from the asset managers. The consequences for getting any of the answers wrong can be severe.

And the pressure from tax authorities for data will only increase, adds Peter Grant, a partner specialising in operational tax at KPMG in the UK. “Across the globe, governments are demanding more and more data, and challenging data quality” says Hall. “The authorities see data as a ‘magic bullet’ that can tackle tax evasion and avoidance, help close deficits, and slow ever-growing levels of public debt.”

They can also use discrepancies they have spotted in one asset manager’s data to look for similar patterns in every other asset manager’s information.

The scope of the tax authorities’ hunger for data is constantly widening. As the tokenisation of assets increases, for example, reporting demands are expanding to cover that area, whilst at the same time domestic governments are seeking ever increasing levels of granularity before granting tax relief under treaties.

Squeezed from both sides

“At the same time, it is becoming increasingly difficult for investors to claim back money they are owed by a tax authority,” says Peter Grant, a partner specialising in operational tax at KPMG in the UK. In many countries, dividend, and in some cases interest payments, are subject to the deduction of tax at source. Thus, withholding tax can result in double taxation, and investors may be able to claim relief when double taxation treaties are in place.

Grant adds: “While it has always taken a long time to be reimbursed by the Italian revenue service, countries like Denmark, Germany and France, which have historically been much quicker at processing refunds, are also applying greater scrutiny and demanding more substantiating information, which significantly delays the refund process, to the point that investors are simply writing this money off.”

Any tax not recovered will reduce the performance of an asset manger’s fund and returns to the investor. That makes the fund less competitive and reduces the amount of money that investors can reinvest.

Consequently, both the revenue and spending sides of asset managers’ balance sheets are under pressure.

How KPMG can help

KPMG has been helping asset managers of all sizes overcome these challenges for many years. David Wren, operational tax partner at KPMG in the UK, says: “We have the skills and the technology to meet the growing demands of the tax authorities. Indeed, we often know what they are looking for, and the information they will request, long before they do so. That means we can help asset managers proactively deal with tax offices, pre-empting their needs and thus saving time and money while preventing any penalties.”

Moreover, KPMG can help clients wherever they operate, as well as those that do business across multiple jurisdictions. That, says Hall, is because “KPMG has people on the ground who constantly talk to the authorities and know the rules and regulations in place across all territories.”

He adds that KPMG also has the technology to provide simple and straightforward solutions. That capability is particularly important for smaller asset managers, which lack the resources needed to deal with the tax authorities in every global market.

Cutting-edge technology

Grant highlights KPMG’s significant investment with “more than $100m flowing in tax technology tools annually, and even more in equipping our people with the technology capabilities they need to thrive as modern tax professionals”.

KPMG has developed a one stop shop to support asset managers, designed in a modular way. This allows us to support everything from full outsourcing to targeted advice, and KPMG will add further tools to support as regulation grows – for example supporting crypto-asset reporting or the EU’s FASTER Directive. Two of the most innovative technologies: the KPMG investment tax insights centre and the automatic exchange of information (AEOI) reporting solution.

The investment tax insights centre is focused on helping asset managers who have outsourced their reclaim function, to identify opportunities for asset managers to reclaim taxes and accelerate reclaims, while helping them keep track of ever-changing local requirements. Clients simply hand data over to KPMG and the dashboard uses advanced analytics to assess that data and identify where tax may have been overpaid, so that clients can then reclaim that money. The problem facing many asset managers, particularly smaller ones, is that they may have generated a wealth of data they struggle to exploit fully, and this is where KPMG can help: the investment tax insights centre provides an answer, offering critical insights into the data.

Meanwhile, the AEOI reporting tool offers an end-to-end solution for the complex data issues that asset managers face. The solution includes data health checks to identify reporting problems prior to submission, a reporting module that converts data into the unique format required for each jurisdiction, combined with advanced analytics that gives asset managers insight into the full range of data that they are reporting, from errors through to year-on-year comparisons.

A costly business

Asset managers face a never-ending battle to satisfy the authorities – and the penalties for failing to do so can be heavy. Once tax officials are alerted to a problem in one area of a company’s dealings, they may decide to investigate all of the company’s tax affairs to see if they can identify other discrepancies.

“That can prove extremely time-consuming and hence costly for the business involved,” warns Grant.
There are other consequences of not responding adequately to demands from the tax authorities or even simply failing to pre-empt their likely demands. The reputational consequences can be significant.

Tax offices are now, for example, using intermediaries to gather information – and if that information is wrong, and a client finds they have been erroneously contacted by officials in pursuit of “unpaid” tax that they do not owe, the effect on the client–asset manager relationship can only be negative.

KPMG has the experience to assist asset managers wherever they operate. Hall says: “We act as a strategic partner to our clients, helping them to manage the competing pressures in the short term and supporting their response to challenges in the longer term.” Outsourcing the onerous burden of meeting the ever-changing and growing demands of tax offices to KPMG frees up asset managers to focus on their main role of generating returns for their clients.

It is far more efficient to let us invest in the latest technology and skilled personnel required to match the growing capabilities of governments across the globe.