Global Tax Services ACSDA Leadership Forum October 9, 2007 William Salva, Director, International Tax Services Product Management, DTCC
Cross-Border Investment Cross-border investment continues to grow because investors: • Look for the most attractive growth opportunities • Seek to mitigate risk/volatility by diversifying
Cross-Border Income Taxation Cross-border dividend and interest income can be taxed at high withholding rates established by the source country, called the statutory rate. Investors are often entitled to reduced rates of withholding established by bilateral tax treaties or source country domestic legislation, referred to as the treaty rate.
Complex Cross-Border Regulations Regulations matrix constantly changing: • Bilateral tax treaties and unilateral domestic legislations • Multiple treaty rates • Beneficial owner definitions and eligibility qualifications • Foreign tax forms and documentation requirements • Language and cultural barriers
Post-event reclaim process: Traditional Tax Relief • Costly • Complex • Inefficient • Time-consuming
Solutions for navigating complex cross-border tax matters – withholding regulations, relief, and reporting requirements. DTC’s Global Tax Services • Foreign: • TaxRelief • TaxInfo • U.S.: • Tax Information Reporting Service • Tax Withholding Services
Foreign TaxRelief • Electronic communications system • Facilitates tax relief at source or via accelerated refund • Select foreign dividend and interest income payments • Qualifying beneficial owners – U.S. / Non-U.S. • Arrangements set up with issuers, agents or foreign tax authorities
Benefits of DTC’s Foreign TaxRelief Service • Easy and efficient • Low cost • Fast payment • Mitigates foreign exchange risk • Improves return on investment • Creates secure electronic records • Simplifies record keeping • Reduces or eliminates documentation requirements (e.g. IRS Form 6166 and foreign tax forms) and paper waste • Increases accuracy and thus opportunity of obtaining relief
Foreign TaxRelief Amount of withholding tax relief secured by Participants via Elective Dividend Service has increased ten-fold over the last ten years. 1996 $163 million 1997 $242 million 1998 $247 million 1999 $237 million 2000 $334 million 2001 $532 million 2002 $549 million 2003 $702 million 2004 $939 million 2005 $1.34 billion 2006 $ 1.60 billion 2007 YTD $1.39 billion Millions
Foreign TaxRelief – Countries Covered • Canada • Estonia • Finland • France • Germany • Indonesia • Ireland • Israel • Japan • Korea • Netherlands • Norway • Puerto Rico • Spain • Sweden • Switzerland
Foreign TaxInfo - Foreign tax withholding and relief information Determine tax relief entitlements on foreign income payments Quick and concise identification by country: • Beneficial owner definitions • Withholding tax rates applicable by beneficial owner type • Documentation requirements • Other country-specific rules, regulations, and procedures Reduce response time to customer inquiries
U.S. Tax Withholding • For Non-U.S. Participants: Must be a “Qualified Intermediary” to obtain tax relief www.irs.gov (Search QI) • U.S. Securities: Available on U.S. source income • Payments Net of Tax: Enables favorable withholding rates at source • Treaty Rates, Statutory Rates, Exempt Rate (e.g. Portfolio Interest Exemption, U.S. Residents). • Withholding & Reporting: DTC withholds tax & remits to IRS. • Year End Reporting: 1042-S Tax Forms.
Qualified Intermediary Benefits • Tax Treaty with the U. S.: Qualified Intermediaries (QIs) can receive treaty rates on Dividends and Interest • www.irs.gov (Publication 515) • No Tax Treaty with the U.S.: Portfolio Interest Exemption • Know your customer (KYC) rules: Required for Portfolio Interest Exemption • QI Responsibilities: • Year End IRS Reporting (1099 for U.S. holders & 1042-S for non-U.S. holders) • Documentary Evidence of Customers – do not have to disclose to DTC • QI Audit • KYC Rules • Full list of Requirements on IRS Website • Consult Tax Advisors
Domestic Tax Reporting (DTax) & Tax Information Reporting Service (TIRS) • Payment Reclassification: Often, income from certain securities is reclassified at year end for tax reporting purposes • DTax / TIRS: Comprehensive year-end tax information reporting service (1099 and 1042-S) • Domestic U.S. Securities covered: • Mutual Funds, • REITs (real estate investment trusts), • UITs (unit investment trusts), • MLPs (master limited partnership), • OID (original issue discount) for REMICs (real estate mortgage investment conduits) and CDOs (collateralized debt obligations) • Broadridge Financial Services: Partnership • www.broadridge.com/investor-communications/us/bank-broker/tax-information-reporting-services.asp