IRS to Audit US Custodian Banks on Withholding Tax Errors

For the first time, the US Internal Revenue Service (IRS) has announced its intention to audit US custodian banks in an effort to identify potential errors in complying with withholding taxes for foreigners investing in US securities. The penalties could amount to millions of dollars for each bank.

Audits of approximately 15 banks chosen at random have begun, including several large custodian banks. Most estimates suggest that, on average, at least 25 percent of the most prominent US-based custodian banks’ assets may be cross-border transactions -- foreigners owning US securities or US investors owning foreign securities.

The IRS aims to ensure that investors are paying the right amount of tax, which depends on the type of investor, the financial instrument or investment involved, and whether the US has a "double-tax" treaty with the country of residence of the underlying investor. Such a treaty allows non-resident investors in US securities, or US investors who own foreign financial instruments, to benefit from lower withholding tax.

Awareness of the ability to reclaim withholding taxes on overseas investments is gathering pace, not only in the US but globally as well. Major financial institutions are beginning to realise that by tracking and reclaiming withholding taxes for their overseas asset holders they can produce dramatically improved yields, presenting an advantage over firms that do not reclaim withholding taxes on behalf of their clients.

As this issue gains prominence in the US, and inevitably in other markets as well, through its market-leading Tax Rate Data Products, Datavenue can provide the necessary tools to make it easier for financial institutions to comply with these new rules, and to avoid the prospect of multi-million dollar fines. With higher true returns, the benefits will be obvious.

For further information please e-mail us at info@datavenue.net