Home Finance Understanding the Full Lifecycle of Transaction Tax Compliance

Understanding the Full Lifecycle of Transaction Tax Compliance

by internationalbanker

Written By: Daniel Carpenter, Head of Regulation, Meritsoft




Ten years ago, the 2008 financial crisis not only made headlines – it also signaled a fundamental shift in how the global banking system operates. Several regulations were put into effect to increase transparency and protect global markets from experiencing a crash so severe once again. Directives like Sarbanes Oxley, Dodd-Frank and MiFID went live, putting the pressure on banks to staff up the compliance department and satisfy regulatory reporting requirements, all of which ultimately made compliance the top priority at any reputable institution.    

Regulatory compliance continues to reach far and wide, and has touched areas from front to middle to back office. A key area that has seen increasing regulatory activity in recent years has been taxation. The recent move to the collection of transaction taxes for underlying products in baskets of derivatives belonging to nationals living abroad, has now brought the Tax Operations department to the forefront of banking compliance. In order to satisfy regulatory requirements, fulfil client needs, and guarantee client data protection under rules like the GDPR, banks are creating and ramping up dedicated tax operations departments, managing and tracking each and every relevant transaction – from start to finish.

With the IRS’ introduction of increased 871(m) rules in 2017 enacting a transaction tax on equity-based derivative contracts, alongside processing 305c tax  and other transaction taxes like the French Transaction Tax (FTT), Double Taxation Treaties (DTT) – smart institutions must weigh their compliance and operational strategies to avoid getting lost in what may seem like a sea of transaction taxes. When considering that regulations like 871(m), 305c, and the FTT have multiple points of crossover, banks need to weigh their options to effectively address often overlapping elements of transaction tax compliance and data usage.

Justin Walker, Head of Tax Operations at Barclays Capital, recently gave us his take on why many banks have undertaken the creation of a dedicated tax operations department, in order to develop a streamlined system for handling the full lifespan of the complex transaction tax regimes.

According to Walker, “Tax compliance is so key because it starts right at the beginning of the lifecycle with client onboarding and continues all the way to the end of asset servicing. Understanding front to back is the only way to ensure compliance.”

Many banks have fallen into the trap of taking a siloed approach to transaction tax compliance – using distinct systems and software providers for each and every tax, requiring repeat builds of interfaces and associated maintenance costs with no central oversight. Tax Industrialization is a strategic alternative that consolidates efforts to address multiple tax needs and reduces repetitive actions and builds. A consolidated approach streamlines transactions for the tax operations department, compliance teams, and ultimately, enables a bank to retain a positive customer experience, preventing any unforeseen or surprising taxation from cropping up.  

Understanding the application of a transaction tax at all stages of the transaction lifecycle is key. It is a misconception that the back office is the only department that must concern itself with the implications of complex transaction tax rules like 871(m). On the contrary, in the front office, bankers must be able to explain to their clients precisely why a certain investment may result in a transaction tax being levied, which transaction taxes it would be subject to, and how much that investor should expect to be taxed.  

Due to the recent development of the EU’s General Data Protection Rule (GDPR), compliance teams are now also having to put processes in place to ensure that all data privacy requirements are met. And though GDPR is a European regulation, U.S. banks that manage money for European clients, or have operations in Europe, are required to follow the rule. Like with retail, social media, or a wealth of other sectors, bank customers give access to their data – potentially including a bank’s outsource partner – permission to access and handle sensitive information. The front office dealing directly with client’s need to confirm that secure systems are being used, rather than disparate Excel sheets in which data constantly changes, leading to confusion, lack of auditability and compliance, let alone inefficiency.  

As if transaction tax compliance was not complicated enough, banks must also be prepared for the other half of the equation: tax reclaims, or the recovery of overpaid tax from authorities. Higher volumes of transactions and an increase in volatility will increase tax reclaims activities, leading to more costs spent on recovery of these taxes and client servicing. A reclaim is required when a double tax situation is presented – a country where shares initiate will also be taxed by the country of its origin. Investors can’t be double taxed which leads to the need for Double Taxation Treaties (DTT), where various rates are agreed upon between countries for a variety of products and entity rates.

When it comes to tax compliance, acquiring the most accurate, up-to-date data and then applying rules, logic and calculation methodology to put that data to work is a huge challenge for organizations. Justin Walker of Barclays continued, “Though we’ve trained talent internally when building up our own tax operations department, partnering with technology vendors has been indispensable. We needed a consistent solution because tax compliance is not a competitor factor for banks, it’s a hygiene factor. Everybody simply needs to do it, and having experts working with our own internal personnel dedicated to these solutions and maintaining them has been very invaluable.”

Walker outlines an increasingly connected future: “I see rules similar to 871(m) being adopted by other jurisdictions as well – not just the IRS. You can’t ignore that FATCA was a U.S-led initiative, which then led to CRS being the global standard in preventing tax evasion. This is just the same objective being achieved by a different means.”

A third-party technology vendor becomes a valued asset for banks when handling the complex and overlapping data, and sophisticated analytics required to comply with transaction taxes. Leveraging today’s emerging technologies such as Intelligent Process Automation (IPA), vendors can assist banks by integrating with the back office, providing a platform for tax operations specialists and compliance departments, offering banks a “golden source,” or a central repository to store and maintain data.

Following a Tax Industrialization approach for your transaction tax compliance approach also minimizes interface costs and removes unnecessary overheads and builds so that banks can focus on what they do best – servicing customers and increasing the bottom line. Investing in one core solution to address multiple tax needs not only prevents costly compliance mistakes in the back office, it also streamlines the customer experience in the front office. And as the customer experience and performance continue to be key differentiators for banks, transaction tax processing and compliance is an area that institutions cannot afford to overlook.


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