With investment suitability becoming a regulatory requirement in many countries in recent years, most financial institutions have introduced respective processes. However, the impact of tax regulations on clients investments often remains untapped, be it in an investment advisory or discretionary asset management context. This fact contradicts an increasing expectation from experienced investors and wealth management clients that require tax efficiency as a basic feature of every financial instrument in their portfolio.
This guide explains how to integrate tax impact information into your processes to offer tax-efficient investment management services with the Apiax rules for Equities, Bonds, Investment Funds, Derivatives and Structured Products.
Before starting, ensure that you have:
- A SaaS subscription to the Apiax API (optional subscription to the platform)
- An active subscription for the relevant digital compliance rules (content)
- A user account with access rights
- A ready to use API authentication and access
- A capable customer-facing solution to integrate
For more information, see Apiax initial account setup.
Business cases and studies
Apiax offers a series of business cases and studies to gain further insights into the business benefits of switching to embedded compliance rather than following traditional compliance approaches.
Refer to the use cases webpage on apiax.com or contact Apiax for more information and an overview of how you can move your business forward with ready-to-use solutions for embedded compliance.
This integration guide provides step-by-step instructions of a business case, taking you through the process of embedding compliance into your environment, team or process. Make sure to follow these steps with your specific case and situation in mind. Adopt and extend rules, attributes and API requests where necessary.
Apiax offers test and live API keys and rule governance and versioning functions for you to test and validate changes before applying them.
Tax implications for investment advice
As a financial institution, you can optimise the after-tax performance of the client portfolios you manage using an embedded adaptable tax efficiency check.
It allows you and your clients to understand the general tax implications of a portfolio and the relative and absolute costs of the tax impact.
This guide explains how to apply the Apiax digital compliance rules to solve such challenges
While some investment advisers and portfolio managers do not have any information on tax regulations at hand, others struggle with the incredible complexity of applying country-specific tax laws at the investment product level. Typically, this process requires reading tax manuals applicable for the client's tax domicile country or consulting in-house tax experts. Both manual processes are inefficient and come with the constant risk of the tax rules being outdated.
On the other hand, understanding tax implications might sound relatively simple from a client or investor perspective. All they expect are answers to these questions:
- What is the general tax implication for a financial instrument on its own, and how does it compare to other available instruments?
- What is the after-tax performance of an investment product?
- Which instruments should be avoided due to their negative tax impact?
Today, the main challenge is the amount of data one must gather to answer the questions above. There are two main factors to consider:
- the relevant jurisdictions or markets in which the investment manager is servicing clients,
- the type of products to offer.
The first point in itself requires a lot of research and analytics to find the best suitable option.
The tax impact rules contain information in regards to
- tax categorisation,
- tax impact for various objects, and
- tax impact rating.
Example to get started
As an example scenario, consider that your client is an investor with tax residence in Switzerland who wants to assess the Apiax rules for tax results such as the categorisation, the impact for objects, and the impact rating. See below how you can consume different results from the digital rules concerning the tax impact.
Tax Categorisation: your client invests in a Corporate Bond. You need to classify this investment product appropriately from a tax perspective to derive the correct tax impact result for the investor. Hence, Apiax screens and classifies products to derive a tax impact result.
Example of output: Corporate bond => Traditional convertible bond.
Tax Impact for various objects: you are an investment advisor, and your client invests in an Equity stock. You use an in-house advisory tool powered by Apiax to learn about the tax impacts of such investment. As inputs, you enter your customer's tax domicile and the product data. Apiax outputs the different tax objects and a description of their tax impact results for you to present to the investor.
Tax impact results apply to various objects such as dividends, interest, repayment of capital, capital gains, capital losses, and more.
Example of output for Ecuador: Dividends, Impact Yes, 26%, and a description.
Tax Impact Rating: Apiax provides you with an indication of how beneficial the investment is from a tax impact perspective. Each product links with a red/amber/green colour rating to state an overall tax impact indication for the investor.
Example of output: Green, and a description.
The figure below depicts the typical action flow of the portfolio manager or investment advisor using an Apiax-powered tool to check the tax impact of the investments.