European Commission launches consultation to improve WHT refund procedures for cross-border investors
14 April 2022
Image: AdobeStock/ Vitalii Vodolazskyi
The European Commission has launched a public consultation and impact assessment on a new EU framework for managing withholding tax (WHT) relief on dividend and income payments for cross-border investors.
The Commission indicates that existing mechanisms for managing WHT relief are slow, resource intensive and costly for both investors and tax authorities. This is the result of complex and divergent WHT procedures that prevail across EU Member States, which are impaired by a lack of standardisation and lack of digitalisation in processing WHT reclaims.
The result, according to the Commission, is that the high costs and complexity of WHT reclamation may drive non-resident taxpayers to forgo their right to apply for their entitlement under tax treaty benefits, thereby reducing their investment returns.
“[This prevalence of] inefficient, burdensome and costly procedures for the recovery of excess tax paid in a cross-border context discourages cross-border investment in the [European] Union,” the Commission finds.
In attempting to address these shortcomings, the Commission is acting on the basis of Article 115 of the Treaty on the Functioning of the European Union (TEFU), which specifies that EU action in the field of direct taxation is “well-grounded in cases where the functioning of the internal market would be hampered by the persistence of uncoordinated national legislation”.
Subject to the public consultation, the Commission will consider a range of policy options with the objective of making WHT relief procedures for cross-border investors more efficient and increasing the ability of tax administrations to target investors that abuse the rights granted under double taxation treaties (DTTs).
This will involve measures to make WHT refund procedures more efficient and transparent — including legislation to establish standardised EU forms and procedures for filing WHT refund claims across EU member states. Potentially, this will also require tax authorities to digitalise what are currently often paper-based relief procedures.
Second, this may involve the formation of a common EU relief-at-source system. This will apply the correct WHT rate, as specified in the DTT, at the time of payment by the securities issuer, thereby removing the need to process tax reclaims after the event.
Third, it will examine avenues for reporting beneficial owner information on an automated basis, strengthening the basis for cooperation and information sharing between tax authorities.
The publication consultation period will continue until 24 June 2022.
This work will dovetail with ongoing efforts by the European Securities and Markets Authority and other industry bodies to tackle fraud incurred in WHT relief claims, including losses to national tax authorities resulting from fraudulent cum-ex and cum-cum schemes.
Securities Finance Times published a comprehensive review of recent efforts by tax authorities to recover cum-ex losses in Issue 299, released on 29 March.
Yesterday (13 April), law firm Rahman Ravelli also published a summary of recent investigations and legal cases relating to cum-ex trading.
The Commission indicates that existing mechanisms for managing WHT relief are slow, resource intensive and costly for both investors and tax authorities. This is the result of complex and divergent WHT procedures that prevail across EU Member States, which are impaired by a lack of standardisation and lack of digitalisation in processing WHT reclaims.
The result, according to the Commission, is that the high costs and complexity of WHT reclamation may drive non-resident taxpayers to forgo their right to apply for their entitlement under tax treaty benefits, thereby reducing their investment returns.
“[This prevalence of] inefficient, burdensome and costly procedures for the recovery of excess tax paid in a cross-border context discourages cross-border investment in the [European] Union,” the Commission finds.
In attempting to address these shortcomings, the Commission is acting on the basis of Article 115 of the Treaty on the Functioning of the European Union (TEFU), which specifies that EU action in the field of direct taxation is “well-grounded in cases where the functioning of the internal market would be hampered by the persistence of uncoordinated national legislation”.
Subject to the public consultation, the Commission will consider a range of policy options with the objective of making WHT relief procedures for cross-border investors more efficient and increasing the ability of tax administrations to target investors that abuse the rights granted under double taxation treaties (DTTs).
This will involve measures to make WHT refund procedures more efficient and transparent — including legislation to establish standardised EU forms and procedures for filing WHT refund claims across EU member states. Potentially, this will also require tax authorities to digitalise what are currently often paper-based relief procedures.
Second, this may involve the formation of a common EU relief-at-source system. This will apply the correct WHT rate, as specified in the DTT, at the time of payment by the securities issuer, thereby removing the need to process tax reclaims after the event.
Third, it will examine avenues for reporting beneficial owner information on an automated basis, strengthening the basis for cooperation and information sharing between tax authorities.
The publication consultation period will continue until 24 June 2022.
This work will dovetail with ongoing efforts by the European Securities and Markets Authority and other industry bodies to tackle fraud incurred in WHT relief claims, including losses to national tax authorities resulting from fraudulent cum-ex and cum-cum schemes.
Securities Finance Times published a comprehensive review of recent efforts by tax authorities to recover cum-ex losses in Issue 299, released on 29 March.
Yesterday (13 April), law firm Rahman Ravelli also published a summary of recent investigations and legal cases relating to cum-ex trading.
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