A streamlined and simplified tax relief process is a goal of governments and pension funds alike. But this objective is becoming harder to achieve as pension funds increase the geographical spread of their portfolios. While investing overseas may generate returns, it also brings unknown and challenging tax and compliance obligations.

Most pension funds are exempt from tax in their own country but the same may not apply in the overseas territory in which the fund has invested. So income and gains from that investment may not be exempt from the source country withholding tax. Pension funds will no doubt look to maximise post-investment tax collection while managing the complex compliance requirements that accompany overseas investment. With pension funds focusing on performance and the ability to meet future funding requirements, any tax leakage can have a significant impact.

Many countries have extensive tax treaty networks that provide for a reduction in overseas withholding tax. Worldwide, there are over 3,000 international tax treaties. However, the bilateral standards under which they operate vary immensely. Collecting tax relief to which a fund may be legally entitled can be challenging, complex and costly. 

Typically, pension funds will appoint a global custodian to safe-keep the securities into which it invests and the custodian performs a valuable role in assisting pension funds with international withholding tax issues. However, the procedures faced by pension funds for claiming the relief to which they are legally entitled are often unclear and complicated and invariably require the fund to provide custom certifications tailored to the requirements of the source country. Despite best endeavours by the custodian to assist, it is unlikely they will have access to, or be able to complete, many of the requested certifications.

Pension funds are tightly-run, often with a small administrative team who bear the responsibility for managing many varied tasks, often without in-house experience or knowledge of the tax environment, or even external access to it. Frequently, pension funds have no contractual links with the expertise offered by these tax specialists and this, combined with their other priorities, means that tax documentation does not always get the attention it deserves.  This can lead to a delay or a possible foregoing of the tax to which it is legally entitled.


Introducing a more streamlined and simplified tax relief process has been a long-held shared goal of the European Commission (The Commission), the Organisation for Economic Co-operation and Development (OECD) and the wider financial community.

The OECD’s Tax Relief and Compliance Enhancement (TRACE) project is aimed at achieving this, and proposals to improve cross-border tax relief procedures were outlined in the TRACE Implementation Package (IP) endorsed by the OECD’s Committee on Fiscal Affairs in January 2013. 

The IP is a self-contained set of agreements and forms to be used by any country that wishes to implement an Authorised Intermediary (AI) system. The AI system can be used by financial institutions, for example custodian banks, which can enter into agreements with the tax authorities of the source country and claim withholding tax relief at source on behalf of their customers.  Customers wishing to benefit from the system must provide a single standardised Investor Self Declaration (ISD) to the AI.

There are many factors that support moving from a tax-reclaim model to a relief-at-source model. In providing global custody services, BNY Mellon routinely seeks withholding tax relief on behalf of its custody clients, typically processing many hundreds of thousands of tax relief claims annually. This represents substantial cross-border portfolio investment flows both in and out of the many countries in which the firm provides global custody services. 

Where investors are increasingly required to complete extensive non-standardised documentation, often for each income payment, the simplification benefits of a standardised relief-at-source system would result in greater certainty and cost reductions for investors and governments alike.

Sadly, no government has yet adopted the TRACE IP system. There are good reasons for this – governments have been busy focusing on other tax compliance enhancement priorities, such as the Foreign Account Tax Compliance Act (FATCA) – but they have not lost sight of the TRACE project.

Some governments are considering the potential benefits and implications of adopting the TRACE IP system. However, it is quite possible that one area that has not been taken into account is the benefits it would bring to the global pension fund industry.

For example, are governments aware of the benefits of a truly global system that allows for the provision of a globe-straddling document, providing sufficient client data, that gives them all of the benefits permitted by tax treaties? Indeed are pension funds aware of this?

The adoption of the TRACE system would surely be seen as a great gift to the pension fund community, which frequently comments negatively about the lack of available or affordable expertise to help it collect what belongs to it.  

A properly designed procedure can contribute to the smooth operation of a withholding tax relief system and BNY Mellon continues to work closely with overseas tax authorities to encourage broad adoption of the TRACE system. We encourage pension funds to do the same.

Lorraine White is head of EMEA securities tax and US tax services at BNY Mellon