FISCO Second Report on Solutions - SRS. Shifting Withholding Responsibility Panel on Withholding Tax

Transcription

1 FISCO Second Report on Solutions - SRS Shifting Withholding Responsibility Panel on Withholding Tax 1

2 O v e r v i e w Why should withholding responsibilities be shifted Existing regimes for tax relief Practical experience New proposals for tax relief Which responsibilities could be shifted? Legal liability and reliance in good faith To whom should the responsibilities be given? The legal basis for assuming the responsibilities How to ensure audit and tax assessment How to ensure recovery of tax and related penalties Customer documentation as proof of tax residency for relief 2

3 Why should withholding responsibilities be shifted? Relief at source is the preferred method because of the optimized cash flow. However, relief at source can only be granted with the help of the entity that has the formal withholding tax responsibility, i. e. the Withholding Agent. Requirement: The Withholding Agent must have beneficial owner information as proof of entitlement to relief. Difficulties arise in cross-border custody chains, when such customer information must be passed through the chain of intermediaries: Information transfer in hardcopy form is too time-consuming and costly. Information transfer in electronic form also creates confidentiality and privacy data issues. Securities transactions around the record date prevent regularly any up-to-date information in time to upstream intermediaries. 3

4 Why should withholding responsibilities be shifted (cont d)? Issuer Paying Agent CSD / Custodian Passing beneficial owner information through a Custody Chain Custody Bank of Investor Investor / Beneficial Owner 4

5 Why should withholding responsibilities be shifted (cont d)? Consequence: the existing administrative and efficiency problems can only be resolved by allowing all intermediaries in the custody chain to assume withholding responsibility. 5

6 Why should withholding responsibilities be shifted? (cont d) Shifting withholding responsibility to any intermediary in a custody chain will have favourable effects on all methods of tax reduction, not only on relief at source: The refund method i. e. tax reduction retroactively means presently in practice that each investor / beneficial owner files a refund claim with the foreign tax authority on his own, could in the future make it easier for an intermediary with withholding responsibility to claim refund on behalf of the investor, and accordingly would encourage beneficial owners to make more use of the intermediaries experts know how. Also the quick refund method should be accomplished easier. An intermediary with withholding responsibility would be able to set his refund claim off against his tax liability. 6

7 Existing Regimes for Tax Relief Overview Regime Source country Effective since Number QI Qualified Intermediary QFI Qualified Foreign Intermediary QI Qualifying Intermediary DTC Depository Trust Company -procedure USA January ,000 Japan April Ireland European countries

8 New Proposals for Tax Relief The ISSA Tax Relief Model under construction since 2003 by JP Morgan (Christopher Gilbert) on behalf of International Securities Services Association (ISSA). Proposed Tax Relief Arrangement by a BNP Working Group - FISCO - Second Report on Solutions (SRS) 8

9 Which responsibilities could be shifted? Responsible Withholding Agent vs. Responsible Non-Withholding Agent. The Responsible Withholding Agent assumes primary withholding responsibility and withholds tax himself. The Responsible Non-Withholding Agent does not withhold himself, but provides either withholding pool information to an upstream Responsible Withholding Agent or establishes sub-accounts with him. Responsibilities of a Responsible Withholding Agent: Verification of beneficial owner s entitlement to tax relief. Archive the documentation requested. Remit the tax deducted to the relevant tax authorities. 9

10 Which responsibilities could be shifted? (cont d) Other Responsibilities of a Responsible Non-Withholding Agent: Similar responsibilities to those of the Responsible Withholding Agent. Exception: No tax withholding. 10

11 To whom should the responsibilities be given? The Dividend and Interest Model : Each intermediary in a custody chain can opt for part (Responsible Non-Withholding Agent) or all ( Responsible Withholding Agent) of the withholding responsibilities. Advantages: Relief at source can be granted by intermediaries without the need to pass on detailed beneficial owner documentation upstream. Relief is only given on the basis of a proper beneficial owner identification and verification of relief entitlement. All intermediaries are treated equally - foreign and local intermediaries; A true level playing field amongst intermediaries is guaranteed. 11

12 Panel on Withholding Tax Q u e s t i o n s? 12

13 Panel on Withholding Tax Additional Questions 13

14 Legal liability and reliance in Good Faith Clear and fair liability provisions required: Clear : Liability is an extremely sensitive area. Fair : No additional liability resources must be introduced by establishing Responsible Withholding Agents; very small margins from custody business. No legal or tax responsibility should be possible to be imposed on authorised intermediaries acting in good faith with authorised intermediaries in other Member States. Option for withholding responsibility must not lead to establish additional liability burdens for intermediaries assuming withholding responsibility. Equal terms and conditions of legal liability as for local nominees required in order to keep up a level playing field. The liability of the Responsible (Non-) Withholding Agent should be understood as shifting the liability from local intermediaries to foreign intermediaries and not to add new liabilities of foreign intermediaries. 14

15 The legal basis for assuming the responsibilities Orthodox approach: Assuming Responsible (Non-) Withholding Agent-status on the basis of a law. However, the development of such comprehensive regime in 27 jurisdictions might become cumbersome. Preferable: A model contract similar to the U.S. and Irish QI regimes. - The Irish QI- one-pager serves as a good example for reduction of bureaucracy. Not only foreign, but also local intermediaries should be entitled to enter into such agreement. Reason: Level playing field. Principle freedom of contract : Intermediaries should be free to decide whether they enter into such contract with a foreign or local tax authority, on a country by country basis. Adaptations of the Member States laws will be inevitable, where the laws currently do not allow shifting withholding responsibility to foreign intermediaries and to create a legal basis for the contract as suggested. 15

16 How to ensure audit and tax assessment Institutions, by which surveillance can be performed directly by the tax authority of the issuer country or by the tax authority of the relevant intermediary or by external auditors or by means of a cooperation of these institutions. Possible audit methods: Periodical audit vs. audit as the case arise. System checks vs. random sampling of groups of investors. 16

17 How to ensure audit and tax assessment (cont d) The FISCO Group recommends the following procedures: It seems appropriate to involve both the tax authorities and external auditors into an audit. The external auditors should focus on periodical systems checks, and the tax authorities should focus on audit actions as the cases arise. The system check should comprise accurate keying of the investors in the intermediary s system; accurate keying of securities data held in custody; accurate functioning and processing of payment streams; accurate tax deduction and timely remitting. 17

18 How to ensure audit and tax assessment (cont d) 26 source countries cannot have the consequence of 26 audits annually. Accordingly: Each Responsible (Non-) Withholding Agent should be subject to systems checks by external auditors periodically. These systems checks should comprise the periodical reports of the internal auditors of the intermediary. The external auditors should file their reports with the supervisory authority or tax authority of the intermediary. The tax authority of the issuer country should be entitled to request such audit report from the relevant supervisory or fiscal authority of the intermediary s country, if need arises. Subject to limitation of 4 years. Further the tax authority of the issuer country should be entitled to request verification from the Responsible (Non-) Withholding Agent based on registers showing the names of the beneficial owners affected, (self-) certificates filed by the intermediary, and know your customer (KYC)-documentation. 18

19 How to ensure recovery of tax and related penalties A legal instrument for the tax authority of the issuer country to recover tax that has incorrectly not been deposited is based on the Council Directive 76/308/ECC of 15 March 1976 on mutual assistance for the recovery of claims relating to certain levies, duties, taxes and other measures, as amended by the Council Directive 2001/144/EC of 15 June However, practical experience since more than 6 years under the U.S. QI regime has shown that even in case of lacking compliance with the QI Agreement no recourse to legal enforcement has become necessary up to now. Reason: The intermediaries involved are financial institutions, i. e. a limited, specific group of economic institutions. A strong practical instrument for sanctions is the possibility of the tax authority to withdraw the status of Responsible (Non-) Withholding Agent. Heavy affect on the intermediary s reputation! 19

20 Simplification and Harmonisation of At Source Relief Procedures Customer documentation as proof of tax residency for relief Currently usual types of customer documentation for tax relief: Certificate of Residence issued annually by the responsible tax office of the beneficial owner Self Certification of the beneficial owner e. g. U.S. Forms W-8xxx and Italian MOD 116 issued periodically or indefinitely valid Know your customer (KYC) documentation Lowest bureaucratic burden for intermediaries and investors / beneficial owners Detailed legal bases: Money laundering Directive (91/308/EEC), National tax rules for customer identification and documentation, U.S. QI-Agreement (Rev. Proc ), KYC-rule application in Germany and Austria for interest payments to non-resident investors. 20

21 Simplification and Harmonisation of At Source Relief Procedures Self Certification as proof of tax residency for relief However, the FISCO Group voted for a self-certificate as primary solution for granting tax relief. Reasons: Complexity of tax residence rules, Indemnification of a Responsible Withholding Agent. Details: Standardised certificates within the EU; To be completed, when opening an account or deposit; Update only, if circumstances change not periodically; Incorrect statement by an investor: in many jurisdictions a criminal act; Electronic handling. 21