Major index providers now offer Tax Adjusted or Total Return Indices, alternative versions of their well-known benchmarks that reflect returns due not only to price changes, but also to dividend income. While these provide a more accurate measurement of performance than indices that simply ignore these income distributions, that is not the whole story.

The actual returns investors realise often depends on their taxation position, which is governed to a large extent by the shareholder’s domicile and any applicable international tax treaties in place between the investor’s country and the payee country. As a result, the amount of tax paid by investors in different locations on an identical investment can vary significantly.

Tax Adjusted Indices, however, combine withholding tax rate data with gross dividend information to produce superior return indices. These generate an even more meaningful return, better illustrating the true performance of international investments, as they account for the actual taxes an investor may be entitled to recover.

Most major index calculators continue to generalise their treatment of True Return Indices by adopting the position of an investor in a representative location (such as Luxembourg or Bermuda), or simply employing a theoretical investor’s position. But in today’s sophisticated financial markets a one-size-fits-all approach to taxation is inadequate. As a result, fund managers continue to struggle to accurately replicate the performance of many income-based benchmarks.

Datavenue provides accurate, reliable and comprehensive withholding tax data for more than 100 countries. This allows index providers to easily establish the true value of each dividend for international shareholders, and enables the benchmarks to reflect true returns from a variety of locations. Importantly, this allows index users themselves to select a benchmark specific to their location, resulting in substantially reduced tracking errors and consistently higher portfolio returns.

If you are interested in learning more about Tax Adjusted Indices, please email us at info@datavenue.net