Industry experts consider the current state of withholding tax in Europe, discussing what their companies are doing to keep up with changing markets, regulations and technologies
Vicky Dean
Chief revenue officer
Goal Group
Paulina Placzkowska
Assistant vice president, global funds management, tax
State Street Global Advisors
Andrew Mangion
Head of tax
Saxo A/S
Larke Sutton
Vice president, global tax services
Brown Brothers Harriman
How do you manage to stay informed about all market and regulatory changes, which are often announced with a tight deadline?
Vicky Dean: This is indeed very challenging, especially given that changes are often discussed for a long time but announced at short notice. We utilise a network of specialists and relationships that we have established over our 30-year history which include accountancy firms and industry publications. We also liaise directly with the tax authorities.
It is incredibly important for us to keep abreast of any changes as our Global Tax Reclamation Solution (GTRS), which is used to calculate the correct rates as well as select and populate the applicable forms, is used by clients worldwide to process their tax reclaims. Therefore, any changes need to be communicated and reflected in the application as soon as possible to ensure clients process reclaims at the correct rate.
Paulina Placzkowska: No two days are alike for tax authorities. Tax changes occur almost every day, ranging from governments’ new legislation and treaty announcements to changes in procedural requirements issued by tax authorities, depositaries or local custodians.
To stay informed about market and regulatory changes, we need to rely on real-time news sources, industry publications, government websites and global custodians. Additionally, we look at automated tools from our tax advisors and services designed to track and report on market and regulatory changes as they occur.
By relying on a variety of sources, we understand not only what is happening, but why it is happening and how it will impact us and our clients. I personally make sure to subscribe to relevant tax news and consult with tax professionals with whom I work on a daily basis. It is important to stay vigilant and proactive in monitoring developments that may impact our business or interests.
Andrew Mangion: My peer network of tax professionals is my strongest asset. When there is an announcement, I can always expect a call to discuss ideas, challenges, concerns or opportunities. When combined with diligent and collaborative sub custodians, we can deal with the unexpected in a controlled way.
Larke Sutton: Keeping on top of the fast pace of market developments is one of the most critical pieces of my job, as is making timely assessments of those developments that result in driving change initiatives. We have a robust capability that combines the expertise of a global base of subject matter experts that are connected to both a complement of tax information resources, including connections to people and tools used by Big Four accounting and law firms. This enables us both to be up-to-date and informed, but also to employ a process that starts with impact assessment and leads us through communication, developing change requirements and engaging across our business to ensure that implementation initiatives achieve our goals of meeting effective dates.
How do you ensure your company’s technology can keep up with all the changes?
Mangion: One of the most undervalued parts of any regulatory change is tracking the lifecycle from announcement to ratification through to execution. Documenting everyday decisions when converting a complex piece of legislation into processes and procedures for the operations team ensures that compliance can be tracked back to the letter of the law. Housing a robust technology solution that tracks change, documents decisions, and keeps stakeholders informed, is invaluable.
Dean: As a fintech, we continually invest in the technology solutions we have available to facilitate and aid foreign withholding tax reclaims. This is true of both GTRS and Treaty Rate Manager (TRM). By utilising the established relationships, we can instantly update our applications to provide the most accurate and up-to-date information in order for clients to process their tax reclaims. We also use these applications in-house for clients who outsource the work to us. In addition, we have a global research team who continually monitor other sources to ensure the correct information is compiled, confirmed and passed on.
Placzkowska: State Street Global Advisors (GA), like any other large global asset manager, needs to ensure that its technology can keep up with changes to international and domestic tax regulations to best serve our clients, remain compliant, manage operations effectively and avoid potential legal and financial issues while mitigating risk.
The first step is to regularly monitor changes in tax laws related to regulatory compliance and withholding tax that may affect our investments. We also ensure that our portfolio management and accounting systems are integrated with tax technology solutions. This can help automate the identification of tax obligations, withholding tax rates and calculations, reducing the risk of errors.
Another factor is robust data management and reporting capabilities within our systems. The ability to easily generate detailed reports and maintain accurate records is crucial for compliance and reporting to investors and tax authorities. My recent experience in reclaim space shows that global tax authorities implement strategies to elevate scrutiny and meticulousness before making any payments of over-withheld taxes. It is important to be able to quickly respond to these inquiries, and that cannot be done without high-quality and effective technology.
Sutton: Being connected across business functions is critical. It is extremely important for us to know our business, and to work with them on an ongoing basis to communicate trends and evolving needs so that we can develop the right strategies and approach to technological developments. The last decade has been transformative in the tax space, with the roll out of automatic exchange of information requirements as well as many US tax initiatives. We expect the pace of change to continue as governments introduce new legislation with the corresponding requirement for even more information to reign in tax abuses. Technology strategy plays a crucial role in responding to these changes.
How do you think the Faster and Safer Relief of Excess Withholding Taxes (FASTER) directive will impact the industry? Will it require EU member states with existing relief-at-source processes to overhaul their current offering to align with those set out in the proposal?
Placzkowska: The EU FASTER proposal has the potential to positively impact the industry as it represents a long-overdue improvement. With nearly a decade of experience in the withholding tax space, I can attest to the challenges we face when trying to recover our investors’ over-withheld taxes.
The most significant impact will be felt in EU countries with ‘reclaim-only’ processes, where investors will experience the most substantial change. The prospect of obtaining immediate tax deductions at source or via quick refund, rather than having to wait a number of years, is something that the industry will eagerly anticipate.
While the FASTER directive aims to streamline the process of obtaining treaty benefits, its implementation will likely require some degree of adjustment for jurisdictions with existing relief-at-source processes.
Member states with outdated reporting processes may need to update their systems to ensure compliance with the directive’s requirements. The bottom line is that this directive offers a quid pro quo, benefitting both national tax authorities and investors. National tax authorities will gain full visibility into the financial chain, empowering them to combat tax abuse effectively. Investors, on the other hand, will be able to submit their withholding tax refund requests digitally, resulting in a faster and smoother reclamation process. Overall, the framework is expected to make the relief-at-source process more efficient, which should reduce costs for all the parties involved.
Dean: For the new directive to be successful, it will be important for all EU member states to ensure they are aligned to support the investment community. This will mean overhauling existing processes to achieve a common objective and standardisation across the board. Whether or not this will be achievable depends on discussions leading up to the proposed launch date of 2027.
It is unclear whether FASTER will be introduced as part of a phased approach, as Germany has done with its new process, or whether the European Commission will adopt a hard launch with a set date, like the US Securities and Exchange Commission is doing with T+1. To simplify this, it would be easier if they abided by one process across the board, which will enable investors and providers to file similarly within the EU.
Less clued-up investors may not understand or be able to achieve the deadlines associated with relief-at-source and quick refund — particularly if long form is removed entirely. In this instance, money will be left on the table.
Mangion: It will establish a digital machine readable EU digital tax residence certificate (eTRC) which will streamline a traditionally manual reclaim process. This will reduce cost and errors, while increasing capacity and accuracy. If the request of the eTRC can be made by a qualified firm, then we can get closer to a straight-through process (STP) for tax reclaims. Having a single process for all member states will also reduce complexity for operational teams, mitigating some risk and encouraging a move to quality.
If you look at the Treaty Relief and Compliance Enhancement (TRACE) initiative, the ambition was to have one common process for all members. However, by looking at individual implementations I can see we are potentially looking at many different flavours of TRACE. I envisage something similar happening under FASTER.
Sutton: FASTER, if it comes to fruition, would be a fundamental change on how withholding tax relief at source is obtained in 27 countries, rather than the handful of EU countries currently offering relief at source today. To provide this opportunity, however, financial intermediaries would need to enter into contractual arrangements with each of the EU tax authorities and agree to provide validated information up the chain. This may require financial intermediaries to implement extensive changes into their data collection systems and for investors to provide additional information, requiring modifications to their existing processes. As currently drafted, the FASTER proposal appears to require a uniform approach for extending relief at source. However, each of these countries presently have very different administrative and procedural requirements, which lead us to expect that solutioning for a FASTER result may be more complicated than just developing a single approach.
Countries that currently have existing, well-functioning relief at source models, such as France and Ireland, might be reluctant to overhaul processes that are currently very effective. We have asked ourselves why the EU Commission’s proposal did not leverage these existing, working systems.
We do, however, see that cross-border investors currently obtaining relief at source in markets with well-functioning relief at source systems may find that such relief now needs to be obtained via reclaims. This increase in reclaim applications could result in additional administrative burdens for countries that successfully administer relief at source today.
To what extent will Germany’s recent modernisation efforts align with the FASTER proposal? How has this huge change impacted the reclaim landscape so far?
Dean: The modernisation in Germany relates to the electronic submission of reclaims which can only be affected by beneficial owners, registered financial institutions or other approved parties, whereas the FASTER directive focuses more on standardisation, reporting and digital certificates. In their current state, the two do not seem wholly aligned.
The changes in Germany have had a huge impact on the industry. Directions on how to file and who is entitled to do so are very unclear and causing uncertainty. There doesn’t seem to be adequate support available from the tax authority. For their part, they are being inundated with paper-based reclaims for those trying to get ahead of the changes.
Placzkowska: Both Germany’s modernisation efforts and the FASTER proposal seek to reduce the administrative burden associated with reclaiming overpaid withholding tax. They aim to create standardised and digital processes for applying for withholding relief and refund, while bringing more transparency and clarity. The adoption of the FASTER proposal by Germany will depend on various factors, including the specific terms of the FASTER directive, Germany’s assessment of how it aligns with its existing national laws, and the political will to implement it. In my opinion, the combination of both initiatives, once introduced and applied, will improve existing processes and set a course for other countries to follow.
It is evident that Germany’s efforts to modernise its withholding tax process have had a substantial impact on investors worldwide. The Federal Central Tax Office is currently focused on implementing a mass-media interface to facilitate future electronic reclaims submissions, a development that has resulted in noteworthy delays in the disbursement of reclaims. The turnaround for Status Certificates issuance has also increased up to five months, which may impact investors’ relief-at-source accessibility.
Sutton: Germany’s modernisation efforts in the Withholding Tax Relief Modernization Act (Modernization Act) and FASTER both aim to simplify the complexity around withholding tax procedures and combat tax fraud, but the means for achieving these desired results differ. One would have to wonder what appetite, if any, the German Tax Authority has for wanting to introduce FASTER after overhauling its withholding tax regime under the Modernization Act.
Both FASTER and the Modernization Act will require additional detailed reporting, but the templates for reporting are likely not to be consistent. Under the Modernization Act, Germany will require that the reporting constitute evidence of appropriate ownership for reclaim relief. Except for qualifying investment funds, Germany is not a relief at source market, and the Modernization Act did not change this. The premise of FASTER is instead to institute a harmonised mechanism for obtaining relief at source and/or quick refund relief. Based on the Modernization Act, it’s unclear if Germany would want to pursue the relief at source and quick refund mandates the FASTER directive sets out.
Despite the fundamental change the Modernization Act brings, beginning with the introduction of the requirement to make all reclaim filings through the electronic portal from July 1 2023, the reclaim landscape in Germany today is uncharted territory.
What are the pros and cons of the new proposed FASTER directive? What can be done to prepare for the changes?
Placzkowska: The primary advantage of the EU FASTER Directive is efficiency, efficiency, and more efficiency. It will have a robust impact on various financial institutions, ranging from individual investors to asset managers and large financial intermediaries. Currently, investors are burdened with more than 450 different forms throughout the EU, some of which are only accessible in national languages. These processes are predominantly paper-based, but the introduction of the digital EU certificate may catalyse an exclusive shift toward electronic processes.
Like any legislative or regulatory change, it may have potential drawbacks, including cost and administrative burdens, reporting challenges and the difficulties associated with interpreting individual legal rules.
State Street GA is taking several proactive steps to prepare. Firstly, there is a need for the continuous monitoring of the latest developments in order to stay informed and understand how the new rules will impact our day-to-day operations. Close cooperation with our tax advisors and global custodians will be needed to identify areas that will be affected by the FASTER proposal. We will be assessing the impacts of the changes upon the services that we provide.
Dean: There are three main objectives to the FASTER directive, due to be implemented on 1 January 2027; a common EU digital certificate, relief at source and/or quick refund options only and reporting obligations.
All three come with pros and cons. If standardisation can be achieved, then this will make EU reclaims much more efficient and streamlined and make the process easier for those who have investments within several EU member states. However, all 27 member states will need to agree on the process for this to be achieved, and with Germany seeming to have no intention of adopting the FASTER proposal, this already presents a challenge.
Additionally, the increase in liability to be assumed by financial institutions — to ensure adequate due diligence of taxpayer entitlement and correct data — could also discourage filing or cause additional measures to be implemented, which would require further work. As the proposal was only announced this year, there is still a long way to go until implementation. Therefore, we will continue to monitor any developments and act accordingly upon further instruction.
Sutton: The stated aims of FASTER are noble: fight tax evasion, provide immediate relief or at least quicker payments to investors, and untangle the complex withholding tax processes in 27 countries. With over 450 forms in place today across the 27 countries, if FASTER can decrease that by 90 percent the process will be simplified for investors in a meaningful way.
We expect that as this proposal may evolve to the development of administrative and procedural guidance, countries will find areas where FASTER can be improved. Potentially the most critical is the lack of a definition around beneficial ownership.
It remains an unsaid but important element for seeking tax relief under FASTER, and without a standard definition you run the risk of having 27 different interpretations resulting in the same investor receiving different treatment in the different markets of investment.
Further, the current thinking that financial intermediaries will need to individually register with each of the 27 EU markets creates a potentially burdensome cost and could result in financial intermediaries making a business decision to not support relief in some of the smaller EU markets.
There is always difficulty in preparing for such a fundamental change without definitive legislation and guidance. The best preparation is being informed about the minimum requirements for obtaining relief at source under FASTER.
Does AI have a place in the withholding tax space? If so, how can it be used effectively?
Dean: AI is relevant everywhere and has erupted in recent years. A lot of people are associating AI with mere chatbots. However, in the withholding tax space, generative AI would provide huge benefits.
With AI expanding into machine learning and algorithms while providing learning, developing and designing capabilities, its benefits to the withholding tax space could provide elevated automation and streamlined processes for all steps of the chain, from investors to tax authorities.
Certain AI capabilities could also be implemented if processes are standardised, particularly under directives such as FASTER. Standardisation could reduce costs for development, as costs can be shared among those who can make use of it.
However, given the complexities in tax reclaims and processes, it would be important to maintain human interaction so that niche queries and situations could be resolved at a personal level.
Placzkowska: There is room for AI solutions to be implemented in the withholding tax space. From an asset manager’s perspective, there is scope for AI-powered solutions to help us efficiently extract and analyse data from various financial documents to identify withholding tax obligations.
Such documents include prospectuses, financial statements, contracts, know-your-customer and other legal documentation.
This approach would reduce the manual effort required for data entry and verification. Additionally, AI algorithms could analyse various information regarding investors or funds and combine it with variables such as the type and source of income, as well as applicable tax treaties to increase the tax efficiency of our products.
Mangion: Common application programming and standardised interfaces for all custodians will simplify the process and reduce rejections.
By combining this approach with digital reclaim or relief-at-source forms and e-signatures, I believe we can truly take a step closer to straight-through processing.
Sutton: We expect that as countries examine data included in all of these new information reporting regimes, they may be well served to employ new capabilities and evolving data analytics.
AI may be part of the government’s future toolkit. However, considering the information included in the dataset (including names, addresses, and taxpayer identifying information), data security should be of utmost concern.
It is conceivable that AI’s ability to automate form reading, data manipulation, and form population could find its way into administrative tools used by financial institutions as well.
Developing technology and automation is key to solution response, as costs of compliance are ultimately transformed into increases in fees charged to investors.
We hope that governments recognise the impacts, and act to take industry feedback focused on streamlining into consideration throughout the consultation period.
