As explained further below, our questions and comments relate to:

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1 Katherina Becker Federal Ministry of Finance Wilhelmstrasse Berlin Germany Dear Ms Becker Tax reclaim services on German dividend payments The British Bankers Association (BBA) is the leading association for the UK banking and financial services sector, speaking for 223 banking members from 60 countries on the full range of UK or international banking issues and engaging with 37 associated professional firms. Collectively providing the full range of services, our member banks make up the world's largest international banking centre, operating some 150 million accounts and contributing 50 billion annually to the UK economy. The International Custody Tax Liaison Group (ICTLG) is affiliated to the BBA and is the principal forum for custody tax practitioners operating out of the United Kingdom 1. In providing global custody services, members routinely seek appropriate tax relief on behalf of their custody clients. The group also works with overseas tax authorities to ensure the smooth operation of procedures for dealing with withholding tax and to eliminate or minimise existing discrepancies in the current tax relief processes and regimes from jurisdiction to jurisdiction. As you may know global custody services essentially comprise the settlement and maintenance of securities assets, the handling of post-settlement events such as income payments and corporate reorganisations and associated cash management. In order to provide such services, our members will normally appoint a bank established in the country of investment to facilitate settlement of securities assets and provide post-settlement asset servicing. These banks are referred to as subcustodians. The global custodians clients will not be direct clients of the sub-custodian and will look to the global custodian to service their requirements. Such clients may be entitled to the application of lower rates of withholding tax on income events pursuant to a relevant double taxation treaty (DTT) or under domestic law. A global custodian will normally facilitate access to such lower rates of withholding tax typically by submitting relevant information or documentation to the local subcustodian or paying agent. It is the ICTLG s view that properly designed and well-publicised procedures can contribute to the smooth operation of a treaty relief system. ICTLG members providing tax reclaim services on German dividend payments to investment vehicles and other customers that are eligible for a reduction in the standard withholding tax rate according to the applicable DTT have identified a number of challenges in respect of the tax relief system in Germany. As explained further below, our questions and comments relate to: 1 ICTLG members include most of the major global custodians (Bank of New York Mellon, BNP Paribas Brown Brothers Harriman, Citibank, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Northern Trust, Royal Bank of Canada, State Street Bank & Trust Co. and UBS AG)

2 2 1. The application of a DTT relief for collective investment vehicles 2. Ad hoc documentation requests 3. Requirements of investors seeking tax relief in accordance with the United Kingdom/Germany DTT 4. The impacts to the refund applications submitted via electronically read data carriers in accordance with 50 d, paragraph 1, line 6, EStG 2002 (Income Tax Law) - (socalled Electronic Filing Procedure) 5. Changes to withholding responsibilities 6. Final tax assessments 1. The application of DTT relief for collective investment vehicles In 2010 the ICTLG and the German Tax Authority (GTA) corresponded on the application of tax treaty relief for transparent investment vehicles. We are appreciative of the open and engaging manner by which you received our comments and hope that the GTA will also be able to adopt a similar pragmatic approach in relation to the issues set out below: We are aware that the GTA has made special provision so that treaty benefits can be claimed - electronically or in paper form, in the name of the investment vehicle, according to the percentage of investors that are tax resident in the same jurisdiction as the investment vehicle. It is our understanding that foreign investment vehicles seeking a refund under an applicable DTT are required to attach, to each German withholding tax refund claim, a Resident Entitlement Questionnaire. We understand that there are two different versions of the questionnaire, each are valid in different cases: i. The general version - Applicable for all non-u.s. entities; and ii. The specified U.S. version - Applicable for U.S. entities. Customers of ICTLG members are experiencing a number challenges relating to both the completion and appropriateness of the questionnaire. The ICTLG have outlined these below and we would appreciate GTA clarification on the points raised. a) Member s initial concerns centre on the interpretation of foreign investment vehicles. It would appear that any refund claim that has been or is submitted where either the words fund, trust, plan or scheme are included in the title are all considered to be the same type of foreign investment vehicle and possibly transparent for tax purposes. ICTLG members consider this interpretation is incorrect as in the UK, as with a number of other jurisdictions; there are a number of different investment vehicles, each of which will have different legal characteristics. Not all of which would be transparent for tax purposes and therefore would not be required to provide the resident entitlement questionnaire. We are seeking certainty regarding the type of entities that would be required to provide the resident entitlement questionnaire. The ICTLG notes that, helpfully, the GTA continuously updates its overview in relation to the required treatment of different types of investment vehicle. This is posted to the German Tax Authority website ( It would be particularly helpful if the clarification sought by ICTLG members could be updated in the GTA website. Further we feel that it may assist foreign investors and their agents if these details could also be published in other international languages such as English.

3 3 b) With regard to the completion of the questionnaire, the ICTLG would welcome clarification on the following points: i. The questionnaire requires the ISIN code of the investment fund/investment asset (i.e. the applicant). However, funds with certain characteristics will not have an ISIN code and it is unclear if the questionnaire is invalidated by the lack of an ISIN code. ii. The questionnaire must include the percentage information in respect of the number of certificated holders in the fund (applicant). We understand that the relevant date for the percentage calculation is the ex-date for the funds income distribution to its investors. Most funds will have more than one ex date within a calendar year and it would be onerous on the fund to complete a questionnaire for each of its distributions. Furthermore, the information would generally be duplicated as the data would be derived from the information computed at the end of the funds financial year. Members note that documentation requirements, which involve frequent updating, can become very burdensome and costly in the case of intermediated investment structures through which large and frequently-changing groups of investors hold their investment assets. This problem was very much the focus of the January 2009 report issued by the OECD, which described the substantial difficulties collective investment vehicles (CIVs) face in keeping constant track of their regularly-changing investor base. iii. It is our understanding that if the percentage threshold test is below 100, the gross dividend tax withheld and recoverable information on the refund application must be adjusted. Operationally, this presents several challenges with both the paper filing process and particularly the electronic filing procedure (EFP). ICTLG members are concerned with the potential implications to customer reporting as a result of these adjustments. Most operators have automated systems and making such adjustments would have upstream impacts on the reconciliation between the amount of income actually paid to the investor, and we consider this would also make the continued use of EFP untenable. The ICTLG would suggest that only the amount of refund applied for is adjusted. In order to effectively manage all new claims ICTLG members require clarity on the above points. However, we are also concerned that claims may have been filed prior to the introduction of the questionnaire and the likelihood that the GTA may be seeking a completed questionnaire retrospectively. ICTLG members are concerned that because of the retrospective nature of the requests, together with the need for more guidance outlined above investors will be unable to provide this information in a timely manner. We are particularly concerned that the GTA could issue a time bound final tax assessment as provided for under Sec. 164 of the German Fiscal Code. We have elaborated on these concerns below at (6). 2. Ad Hoc documentation requests The ICTLG understand that the GTA are requesting information relating to the transactions of securities for which reclaims are being filed. Members appreciate that the tax authorities have a legitimate right to validate entitlement to any refund claim before it is honored however the information required often relates to transaction history for many years, often three or more. Such information may not be readily available because either the investor or the institution, operating in accordance with the relevant data protection legislation has disposed of this information. Additionally many investors will transact via one or more custodians and therefore required to amalgamate the data, this is both complex and time consuming on the investors.

4 4 We are particularly concerned that the GTA could issue a time bound final tax assessment as provided for under Sec. 164 of the German Fiscal Code. We have elaborated on these concerns below at (6). 3. Requirements of investors seeking tax relief in accordance with the United Kingdom/Germany DTT The revised Germany and United Kingdom DTT came in to force on January 1, The DTT amended the residency requirement, specifically Article 4 replaces the subject to tax requirement with a liable to tax test. Article 24 in the revised treaty also stipulates that that income derived from the treaty partner must be repatriated before it becomes eligible for benefit under that treaty. It is our understanding that the spirit of the DTT generally allows the refund to the extent that the party claiming treaty relief is a taxpayer in the United Kingdom. Historically all tax reclaims have been honored, however member s local agents have different interpretations of the requirements to satisfy the repatriation conditions. Specifically some require paper evidence to prove income has been credited to an account in the UK before any refund claim will be accepted for processing. ICTLG members have consulted with the UK tax authorities (HMRC) on this matter. HMRC have confirmed that the requirement applies to UK individuals only. It would be helpful if the GTA could confirm this and separately communicate this to all the regional tax offices and German withholding tax agents. ICTLG members are concerned that absent clarity in this regard it will only be possible to process tax claims for UK investors via the paper based method. We discuss the impact of this to the EFP procedure below. 4. Refund applications via electronically read data carriers in accordance with 50 d, paragraph 1, line 6, EStG 2002 (Income Tax Law) - (so-called Electronic Filing Procedure) In 2003 the GTA implemented the EFP procedure. This was seen as a positive step toward simplification of the reclaim system and a reduction in administrative costs associated with tax treaty reclaim processing. Many ICTLG members are EFP participants. Global Custodian Banks are able to become EFP participants providing they meet certain conditions. Penalties and fines are levied for non compliance, and final expulsion of any participant that continually fails to comply and expulsion from the EFP procedure. The ICTLG is concerned that the ad-hoc and retrospective nature of the various additional documents noted above increase the likelihood of non compliance by an EFP participant. In addition to these concerns, members note that EFP participants must collect an EFP Investor declaration (ID) from each customer. The investor will have completed this document in good faith based on the requirements at the time of signing. With regard to the income repatriation requirements under existing DTTs ICTLG members note that the investor will have signed this document prior to the income payment upon which a tax reclaim is being made. The investor will be aware of its obligations but under a spot check process however it may not be possible for the end investor to evidence the income repatriation documents within a specified timeframe and therefore likely to fail the spot check. Given the issues highlighted above it would appear that it is not possible to seek treaty relief via the EFP process for UK investors, investment funds or any customer with the name fund in the title. As a result of these uncertainties some ICTLG members have reverted to paper filing, we believe this is a retrograde step, increasing costs for the GTA, investors and custodian banks. The ICTLG would

5 5 welcome further engagement with the GTA as means of reducing these compliance burdens and working towards an effective system which suits all parties. 5. Shift of the withholding obligation from the distributing company to the paying agent Effective 1st January 2012, the obligation to withhold tax on German dividends was transferred from the dividend distributing German corporation to the German paying agent. The ICTLG understands paying agent to mean the German custody bank of the final beneficiary, if any, and/or the custody bank in the custody chain paying the German dividend. We also understand that these new procedures should ensure that the entity issuing the tax certificate for the purposes of refunding or crediting of the tax withheld is the same entity which effectively withholds the tax. Therefore, the new procedure should prevent any situations where tax vouchers or tax certificates are issued for tax which has not been withheld. The ICTLG welcomes these changes which we consider a positive step toward possible adoption of the procedures envisaged by the work of the OECD s Treaty Relief and Compliance Enhancement (TRACE) project of which Germany been an active participant. In consideration of the new procedures, ICTLG members are concerned that some of the new rules may have been misinterpreted and not operating as intended. In certain cases it is possible that payment is made to a non-german paying agent who then passes the payment to a German paying agent, the tax will be applied twice because there are two German paying agents in the income chain. For example German dividend distributing company - German custodian - Clearstream Luxembourg (CL) - German custodian of the final beneficiary. If CL has to apply tax (or they would have received a net dividend) before passing onto the German Bank, the German Bank would then have to apply withholding tax before paying the end client. The paying agent (having made the withholding of the German dividend withholding tax) rather than the distributing corporation has to issue a formal tax certificate stating the German dividend withholding tax. The withholding tax must be forwarded within the custody chain (i.e., if an account is held with a foreign custodian, the respective foreign custodian must obtain the withholding tax certificate for its custody client from the German paying agent). The example above is for illustrative purposes only. The ICTLG believes that there is a substantial risk that double taxation may occur under current interpretations of the new rules and would ask the GTA to clarify how it expects the new rules to be applied. 6. Final tax assessments We understand Sec. 164 of the German Fiscal Code authorises the tax office to issue a tax assessment to be made "subject to later verification". A tax assessment that has been issued "subject to later verification" may be amended any time as long as the statute of limitation has not expired. Sec, 122 of the Fiscal Code provides that a tax assessment is deemed to have been notified to a foreign addressee one month after the day the assessment has been delivered to the postal service. We understand if a response, of an appeal is not made within the one month period the tax assessment is considered final. The ICTLG recognises that governments have a right to validate any refund claim before it can be paid however we also consider that eligible claimants have an unconditional right to repayment under treaty and that domestic tax provisions should not obstruct treaty relief entitlements, provided the claim for treaty relief is filed within the relevant statute of limitations. Further, as a practical matter, the requirement for foreign claimants and/or their competent tax authorities to respond within one month is impractical given common industry processes. Furthermore this can result in a

6 6 contradictory situation whereby a claim filed is denied if the additional information request is not responded to within the one month deadline, but an identical claim is refunded without any problems. This appears to run contrary to the general principle of equal treatment under the law. The ICTLG contends that the basic principle that underpins DTTs is compromised if Germany denies tax relief to claimants that are legitimately entitled to that relief under the treaty on what seems at face value to be an inappropriate technicality. It should be borne in mind that German withholding tax that is rendered unrecoverable as a result of this practice will not usually be creditable in the claimant s country of residence. Moreover, the current GTA requirement for recipients of rejection notices to file protective appeals within one month (if they are not in a position to provide the additional information within that time) serves no logical purpose. Rather, it results in an unnecessary administrative burden for the recipient and a flood of additional paperwork for the GTA. Given the concerns outlined above the ICTLG does not believe that it is appropriate for the GTA to continue this practice. Claims should only be finally cancelled where it is proven that the claimant does not have a legitimate entitlement and not because of a timing issue for provision of information The ICTLG members are aware that Germany has been an active participant in the OECD s Treaty Relief and Compliance Enhancement (TRACE) project. ICTLG members have also been active in that project through the business industry advisory group (BIAC) and fully support its goals. ICTLG members believe that many of the issues described above would be eliminated by the adoption of he OECD s proposed Authorised Intermediary (AI) regime. In particular our concerns regarding the longevity of the EFP procedure, the resulting increase in paper based reclaim filing and demands on investors to regularly renew documentation would be addressed by the adoption, by Germany, of the OECDs AI regime. For example; Reporting The proposed system allows a foreign financial intermediary AI to claim treaty benefits on behalf of its customers by entering into an agreement with a source country. Among others things the AI must obtain from its customer an investor self declaration (ISD), perform the necessary validation checks, and finally report to the source country tax administrators, annually, investorspecific information regarding the beneficial owners of the income for which a claim is sought. When fully implemented, the system would provide a robust process by which both source and residence countries could determine whether income for which treaty benefits are being claimed is in fact eligible for such benefits and also whether it is being taken into account by the investor when it prepares its residence country tax returns. Client entitlement checks Under the proposed system the AI has an obligation to review KYC documentation and other information available to determine whether the ISD provided by its customer is unreliable or incorrect. As a result, AIs are in a better position to verify, upfront, the treaty entitlement of the investor both because of the customer relationship and the obligation to verify claims made against KYC documentation. It would appear that the intermediary can undertake these checks in a more efficient and timely manner than the GTA. Documentation Helpfully, under the proposed system, the ISD form will be valid for five years. We also note that provisions are made for investment funds. Crucially the form simplifies the methods by which funds can claim treaty benefits and reduces the frequency of percentage tests and provision upstream of this information. ICTLG members consider that the documentation requirements under the proposed system would greatly reduce the existing administrative burdens and reduce the various ad-hoc document requests.

7 7 The benefits of using a standardised form result in a greater degree of clarity around eligibility and reduce costs of compliance. For Governments the simplification of the claim process may lead to increased capital inflow where investors, previously unable to obtain tax relief on portfolio income, may make investment decisions based on an increased post tax yield. In a recent report the OECD made further comments with regards to the problems associated with tax reclaims and ICTLG members endorse those comments. 2 ICTLG members recognise that some of the issues the GTA are trying to address when validating DTT claims may not be fully resolved by the proposed AI system. However the ICTLG considers that countries that receive investor-specific information by mean of improved reporting would have the tools necessary to focus their further inquiries on the specific taxpayers that may present issues. Enabling source countries to concentrate resources on compliance and reduce the administrative costs arising associated with the current system. Members view the work done by the TRACE Group as highly valuable and well-designed to meet the OECD s objective of developing proposals to improve the procedures for claiming treaty benefits on cross-border portfolio investment income and thereby to eliminate unjustifiable hurdles to legitimate claims for treaty relief and in light of the points made above would encourage the GTA to consider adoption. Again we thank the GTA for its willingness to engage with industry on such matters and we would be happy to discuss the points raised. Yours sincerely Sarah Wulff-Cochrane Director, BBA T +44(0) E sarah.wulff-cochrane@bba.org.uk On behalf of the British Bankers Association 2 Report Of The Informal Consultative Group On The Taxation Of Collective Investment Vehicles And Procedures For Tax Relief For Cross-Border Investors On Possible Improvements To Procedures For Tax Relief For Cross-Border Investors 12 January 2009, page 9.