Meritsoft Creates Module for Dividend Tax Tracking

Software vendor Meritsoft, which is owned by IT services giant Cognizant, has updated its tax management platform to give banks oversight of trading activity, in the wake of the European “cum-ex” tax evasion scandal.

The vendor’s cum-ex manager aims to give banking clients complete oversight of their trading activity to monitor when and if they are eligible to recover dividend withholding tax.

Daniel Carpenter, Meritsoft’s head of regulation, said the module was a “logical extension” to the company’s existing platform, which has offered tax solutions, including for Financial Transaction Tax (FTT), since 2013.

“This was just another stepping stone on the platform. We know taxes are going to increase globally, and we had clients asking about available solutions to help them manage and comply with requirements. Globally, governments are definitely focusing on tax revenue generation; hence its high profile in the industry. So, we thought about how we could adapt what we already had, what extra datasets we needed to feed into the platform, and what rules we needed to change in our decision trees,” Carpenter says.  

Two former London bankers were convicted in March for tax evasion, the first criminal conviction in the long-running cum-ex dividend tax scandal. The tax evasion, a form of dividend tax arbitrage perpetrated during so-called “cum-ex” trades, fleeced European countries of billions of euros, and has led to renewed focus on tax evasion by authorities in Europe and the UK.

Thanks to this heightened awareness, banks will have to demonstrate transparency around trading activity, Carpenter says.

“They have to be able to audit their trading activity and prove to auditors, accountants, or regulators that they are following the tax rules. We spent a lot of time talking to our clients and working on building out a plan that is transparent,” he says. “So from a cum-ex perspective, this is about identification of appropriate tax reclaims and then saying, ‘I can and need to reclaim X only,’ but thereby ensure not more than one person is reclaiming the same tax.”

Carpenter says the cum-ex manager provides oversight of the trading lifecycle in any security and its underlying derivatives, from the safe harbor point (12 months prior to the dividend payment date) to the 45-day post-dividend window. Stock trading activity is viewable on a “first in, first out” basis, ensuring that firms are fully aware of their trading behaviors.

The cum-ex software is ready for installation at user firms.

“The solution requires us to reformat data coming in from other systems. We have rules set up for hedge tracking, safe harbour analysis, and the tax calculations. If required, we can then submit the tax reclaim form electronically,” Carpenter says.

Automation may help firms make tax management more efficient, he adds, since financial organizations tend to have standalone systems and interfaces for each different tax regimes, dealing with each in silos. Carpenter suggests banks devise systems to deal with tax solutions centrally and address legacy issues systematically in a phased approach, arguing those steps will reduce the number of interfaces, software and hardware footprints, and repeatedly leverage the same data and technology for new tax rules: “If I have a derivative feed, why feed it into five systems to handle five different problems?”

Additionally, banks need a lot of complex data to help ensure compliance with the withholding tax regulation, and that data is usually shared across multiple systems. Carpenter says Meritsoft clients have not been tracking all their tax requirements automatically.

“Industrial-scale automation is required to derive meaningful analytics that help ensure banks operate within the rules. This is a core strength of the platform,” Carpenter says.

Journalists from 12 European countries uncovered the so-called cum-ex scheme in 2017. A network of bankers, brokers and lawyers robbed European countries of billions in dividend tax revenue, by systematically exploiting a loophole in various countries’ tax codes, and performing cum-ex (a Latin term meaning “with without”) trades, where shares with and without dividend rights were traded between market participants just before the payout date for the dividend, allowing traders to claim back double the tax. Germany was the country worst affected, with about $36.2 billion withdrawn from its treasury, but France and Belgium lost billions also.