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ArchivedEffective: 1 March, 2006 - 31 December, 2013Categories: FeesSource: GIPS Handbook, 2nd Edition
The Standards state in Provision 5.B.1.a that gross-of-tax performance is currently recommended for the presentation of results to prospective clients, yet Provision 2.B.1 recommends that portfolio returns should be calculated net of withholding taxes on dividends, interest and capital gains. Please clarify.The case for reporting international results net of foreign withholding taxes is based on the concept of reporting performance net of transaction costs. Just as a manager’s performance includes his ability to negotiate transaction costs, internationally a manager’s performance is based on his ability to choose the countries in which to invest based on tax consequences. Basically, a manager has control (to some degree) over transaction costs for his clients, just as a manager has control over which countries are represented in a portfolio. Country selection is part of the performance process and should include analysis of tax treaties. Specific country tax impact should be part of the performance process, just as security selection (net of transaction costs) is part of the process.
It should be noted that if a foreign client has decided to put their investment portfolio with the firm, and it is the client’s actions that are incurring the taxes, the firm would justifiably report this non-domestic account’s performance on the same basis as the domestic investors, i.e., the return of the foreign investor’s account should be gross of domestic withholding taxes, but could be reported either way.