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This article was produced by SIX  as part of their valued industry partnership with Fund Operator.

What Are the Biggest Taxation and Compliance Challenges?

Financial institutions are constantly called on to untangle the complexities involved in identifying domestic and cross-border tax requirements in connection with financial products or alternative financial instruments for issuers or individuals. 

Here are four of the biggest challenges when it comes to fulfilling tax compliance obligations:

1. Financial Transaction Tax

Complying with stamp duties and financial transaction taxes (FTTs) on securities and derivatives is already a demanding challenge today. However, managing FTTs is becoming even more challenging because an increasing number of countries are introducing or modifying transaction taxes. 

Financial institutions must accurately and efficiently identify currently valid as well as future FTTs and must be capable of dealing with them accordingly. They need up-to-date country-specific data on all securities and derivatives affected in order to be prepared when FTTs enter into force. Pre-trade checks and the fulfilment of operational requirements are needed in order to be able to calculate taxes on eligible transactions. 

2. Tax Withholding

The vast majority of investors currently receive no or only a small withholding tax refund because the critical information is missing and the procedures are cumbersome. This owes in part to the multitude of double taxation treaties, national legal provisions, and European Court of Justice rulings.

Financial institutions need customised data services and solutions that enable them to comply with country-specific tax regulations within the prescribed time frame. Every legal system has its own deadlines, which sometimes coincide with the dividend-pay-out date or may be harmonised with the calendar year or fiscal year.

3. Tax Suitability

Asset managers have to deal with more complexity than ever these days when it comes to navigating individually applicable tax regulations for investors in connection with investable financial products and their associated tax charges. Investors are becoming more and more demanding and are increasingly requesting information about the tax implications of their investments. 

Enhanced and enriched data are needed in order to make investment decisions that are sensible from a tax standpoint and that comply with regulations. The data must be complete and up to date and must be granular enough to reveal the actual tax implications of an investment. Gaining insights about tax implications at the level of individual securities and the ability to anticipate tax-related expenses enable asset managers to optimise their clients’ investment portfolios.

4. Tax Reporting

The US Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to disclose information on US accounts or to levy a tax on them. Furthermore, more recent tax laws such as Section 871(m) and Section 1446(f) of the US Internal Revenue Code also apply to non-US persons and could compel them to submit a US tax declaration (in case of publicly traded partnership for instance).

Financial institutions must collect and analyse an enormous amount of new data in order to comply with the IRS’s regulatory requirements, classify clients and counterparties, and be able to execute withholding tax processes. Data are needed to determine which companies are publicly traded partnerships under US tax law, and data are needed to flag clients whose tax domiciles differ from the jurisdiction of their accounts.

Get more information with our Tax Navigator.

 

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