Treasury Practice

Problem Solved: Frank Figiel, Ideenkapital Financial Engineering AG

Published: Jan 2006

Changes in the US Internal Revenue Service and revised data protection laws made it a huge task to distribute tax refunds to its investors. However, Dresdner Bank’s bespoke tax refund collection service, solved the company’s problem by enabling the receipt of electronic ACH payments.

Frank Figiel

Board Member

Ideenkapital AG, a 100% subsidiary of ERGO-Group, develops and distributes high yield financial investment products. The company’s product portfolio comprises closed-end funds investing in US and European real estate, media, alternative energy, ship finance and life insurance products. In addition to Ideenkapital’s investment products for institutional investors, the company has a business to business distribution agreement with banks, savings banks and other financial institutions that offer its financial products to private investors.

Problem…

Ideenkapital provides German investors with a range of closed-end US real estate investment funds. All investors in these funds have to effect tax prepayments on their investment income. Due to a US-German double taxation treaty, most investors will qualify for a tax return once they have filed a tax declaration with the US Internal Revenue Service (IRS). These tax returns are paid electronically via ACH within the US. However, according to an internal IRS rule, tax refunds to non-US accounts can only be paid by cheque. As a result, the fund initiator received 13,000 annual tax return cheques.

Before the cheques could be forwarded, they had to be manually processed into the company’s ERP system and reconciled with each investor’s data. The cumbersome manual process of matching and reconciling tax refunds with individual investor data was further complicated when new data protection regulations were introduced in the US. These regulations prohibited the IRS from printing the investor’s personal tax number on the cheque. The costs arising from manual processing, reconciling and managing exceptions increased exponentially with the number of cheques that had to be handled.

Ideenkapital’s Frank Figiel, at the time MD of the fund initiator’s Client Service division, investigated several possible solutions. “We could have easily opened a trust account in the US and redistributed the payments from there. However, the IRS only allows 10 annual payments to any single bank account in a year, in order to prevent fraud. At the same time, asking all investors in US funds to open a bank account in the US was clearly not an option.”

…Solved

Figiel approached Dresdner Bank, seeking a solution. “It was only natural to approach Dresdner Bank, as the bank was already a strong partner in the distribution of our US emitted funds.”

Dresdner developed a bespoke tax refund collection service to increase the reliability, efficiency and transparency of tax refund collections, by enabling the receipt of electronic ACH payments. To avoid the IRS rule that prohibits more than 10 payments to an individual bank account per year, Dresdner Bank came up with a solution that involves the use of virtual accounts for all of Ideenkapital’s US funds investors. Ideenkapital had to open one account with Dresdner’s New York (DBNY) branch. Each investor then received a virtual account number composed of: a tag for the fund initiator; the tax year; and the investor’s personal tax number. This information, together with DBNY’s ABA routing number, necessary for funds transfers in the US, is included in the tax declaration prepared by Ideenkapital’s US tax advisor on behalf of each investor.

The tax declaration instructs the IRS to pay any tax refunds electronically to the respective virtual accounts of the investors. When Dresdner’s banking system recognises a payment to a virtual account number, it automatically transfers the funds to Ideenkapital’s New York account. The system simultaneously copies additional payment information – consisting of the investor’s name and tax number – onto a SWIFT MT940 balance statement. This allows the fund initiator to book and reconcile the payment information in its ERP system. Incoming payments can now also be matched against a bulk file sent by the company’s US tax advisor – a process that greatly facilitates the detection of errors.

Once a week all funds from Ideenkapital’s New York account are transferred to the fund initiator’s German account, from which the tax refunds can be paid out to the investors. “Most of the investors would like to receive their tax refund in euro. The tax refund collection service now enables us to meet these requests. We can offer three different payment methods:

  1. Conversion into euro and payment via the cheaper German domestic system.
  2. Payment transfer in USD.
  3. USD bank order cheque sent by post.

Dresdner’s tax refund collection service helped us reduce manual matching and processing costs. The service has also improved the monitoring of payments and the management of exceptions. Most importantly, it results in faster payments to investors via a payment method of their choice.”

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