Love Taxes, Operations: Be a Tax Ops Director

Knowledge of processing 1099 Forms, cost basis-reporting, Internal Revenue Service Section 871(m), financial transaction taxes and corporate actions, FATCA, and issues and errors management. Over ten years of corporate tax compliance experience necessary.

Those are just some of the qualifications that large global asset servicing providers — Societe Generale, BNP Paribas and JP Morgan — are seeking before hiring a new director of tax operations to oversee a centralized team of tax operations analysts and managers. The director’s priority: to create enterprisewide best practices to replace a hodgepodge of policies that could lead to higher costs and errors.

Tax operations represents the intersection of operational tasks with regulatory compliance to tax codes across the globe. It also represents one of the fastest growing employment categories in the asset servicing industry in 2018, say tax experts. The main reason: global banks are starting to worry about financial penalties for non-compliance that could exceed US$1 million.

“The importance of tax operations as a risk mitigation and compliance function was refocused during the adoption of Sarbanes-Oxley and was further strengthened because of FATCA,” explains Jared Goldberger, a partner with the law firm of Mayer Brown in New York. Section 404a of the Sarbanes-Oxley Act of 2002 requires companies to develop the right controls to ensure correct financial reporting. The Foreign Account Tax Compliance Act (FATCA), adopted in 2010, requires non-US financial firms to identify and report any foreign accounts and overseas income earned by US persons. The recent global version of FATCA, falling under the Automatic Exchange of Information and Common Reporting Standards, forces financial firms also track down and report on non-US persons outside their home markets.

What to Know

Fortunately, directors of tax operations don’t have to understand the nuance of every tax code. That’s what tax attorneys are for. But directors of tax operations have just as hard a job. “Tax operations directors are operations experts who understand how to apply taxes,” says Len Lipton, a managing director of New York-based tax operations outsourcing firm GlobeTax. “Akin to compliance managers, directors of tax operations need to design the workflow and establish the technology needed to comply with each tax regulation.”

The workflow refers to the process for determining which systems hold which data and how the data is collected and validated before the withholding tax is calculated. In an ideal situation, the correct amount of tax is withheld at the time of an income or dividend payment. Then comes the final part: reporting on the tax paid to the correct tax authority. In the case of over-withholding, the bank will likely file the necessary paperwork with foreign tax authorities to “reclaim” the excess amount. Global custodian banks typically rely on their agent banks in locations outside their home country to handle withholding tax matters for investors in foreign markets.

“The best tax operations directors are those with experience in processing corporate actions such as reorganizations, which would require them to recast complex notifications into simple language, incorporate investor decisions and make payments,” says Daniel Carpenter, a director at London-based tax technology firm Meritsoft. In some cases, they might have also worked in proxy voting which requires the transmittal of corporate agendas and receipt of votes.

Corporate actions come in all flavors ranging from simple mandatory income and dividend payments to more complex voluntary tender offers, exchange and merger offers. Likewise, there are multiple tax codes which fall under two broad categories of withholding tax and everything else, explains Carpenter.

Withholding tax applies to tax which is deducted from an income or dividend payment, as is the case with European financial transaction taxes or tax on US equity-linked derivatives under IRS Section 871(m). FATCA also requires foreign financial firms to deduct the maximum of 30 percent of withholding tax from interest or income payment to US persons, if they have not provided the correct paperwork to identify themselves to the IRS. However, the primary goal of FATCA and its global equivalent is to identify potential tax evaders.

As is the case with mistakes in corporate actions or proxy voting, bad data and bad timing are responsible for mistakes in the amount of withholding tax deducted from a payment or in tax reporting. Yet another source of problems: not capturing a transaction in a tax withholding system. “Tax operations directors need to implement and review the results of periodic testing of tax-related applications to determine whether the workflow and technology are functioning properly,” says Cameron Routh, chief commercial officer for tax and analytics at cost-basis reporting software provider Scivantage in Jersey City, New Jersey.

In some cases, customer onboarding will also fall within oversight of the central tax operations department. Financial firm must verify identities, citizenships and residencies of their customers to ensure the correct tax is reported and withheld. When it comes to institutional investors, such as corporations or investment funds, beneficial ownership also needs to be tracked.

What to Do

Compliance with tax regulations isn’t cheap. To control overhead costs, tax operations directors need to establish common procedures to be used for each tax code throughout the bank and ensure than tax analysts specializing in tax codes related to an individual business line are following those policies. Reporting to chief operations officers, tax operations directors will likely manage a squadron of tax operations managers located in offshore locations, primarily India. In some cases, compliance with FATCA and CRS will be included within the director of tax operation’s jurisdiction, while in other cases it will fall under a separate business unit.

The best tax operations directors, experts tell FinOps Report, will also help the bank save money by leveraging the same customer and transactions data for multiple tax regulations. Until recently, it was typical practice for banks to store the customer data and transactions data in multiple repositories, which increased the likelihood of inconsistent information. However, the number of those databases is declining as banks try to reduce operating costs and ensure accuracy. Banks could also decide to consolidate their systems for withholding tax rather than rely on multiple systems depending on the financial instrument or business line involved, says Carpenter.

Tax operations directors eventually have to decide whether to rely on either licensed technology or even outsourced services when they feel they cannot afford to keep the necessary expertise in-house. Meritsoft’s application for compliance with IRS Section 871m helps financial firms to determine whether their US equity-linked derivative transactions are subject to withholding tax and whether or not qualified derivative dealers (QDDs) must pay a withholding tax. To avoid “cascading withholding” or excessive withholding on related transactions, the IRS is allowing non-US broker-dealers or banks to become QDDs. In exchange, QDDs must complete the necessary paperwork and confirm they have procedures in place to test, track and report transactions associated with their activities as QDDs.

Scivantage’s software-as-a-service lets financial firms calculate the cost-basis of an account while GlobeTax, best known for withholding tax operations for depositary banks issuing American Depositary Receipts, offers a full-blown outsourced services. GlobeTax can help financial firms file the correct data and paperwork with tax authorities so their clients can pay either the correct withholding tax at the time of an income or dividend distribution or “reclaim” excess withholding tax.

Last but not least, tax operations directors need communication skills. “Tax operations heads also need to be good project managers because every tax code ultimately requires establishing a course of action,” says Goldberger. The course of action involves coordinating with corporate tax managers, technology managers, and business line managers.

For all the hard work and qualifications tax operations directors require, the compensation isn’t all that high. Annual salaries range between US$150,000 and US$200,000, say executive search specialists in asset servicing. “You have to be a personable plumber or car mechanic who will be prepared to handle a small job or a major overhaul,” says one manager of a New York-based executive search firm. “It’s a thankless job.”