Non-paper on the withholding tax for discussion at the Expert Group on barriers to free movement of capital 28 September 2016

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1 EUROPEAN COMMISSION Directorate-General for Financial Stability, Financial Services and Capital Markets Union INVESTMENT AND COMPANY REPORTING Free movement of Capital and application of EU Law Non-paper on the withholding tax for discussion at the Expert Group on barriers to free movement of capital 28 September 2016 INTRODUCTION Out of the 26 Member States (MS) which responded to the Commission s consultations on national barriers to free movement of capital 1, 14 identified burdensome withholding tax (WHT) relief 2 as a particular issue. To avoid double taxation of cross-border investment, most bilateral taxation treaties among MS provide for WHT refund. Yet, in practice, it is often too complex and costly for investors to effectively claim and receive relief. The WHT issue is a key element of the Commission's initiative to build a Capital Markets Union (CMU). The CMU Action Plan notably includes the following action: "To encourage Member States to adopt systems of relief-at-source from withholding taxes and to establish quick and standardized refund procedures, the Commission will promote best practice and develop a code of conduct with Member States on withholding tax relief principles." The Council has stressed several times that it is crucial to remove tax barriers in order to achieve financial integration in the EU. The Council's conclusions of 10 November 2015 strongly supported the CMU Action Plan, notably by stressing the need for "pragmatic solutions to long standing tax obstacles such as double taxation linked to current withholding tax arrangements". Given this political mandate, the objective of the work stream established by this Expert Group is to improve the efficiency of WHT relief procedures in a pragmatic manner. 1 Questionnaire on barriers to free movement of capital, sent to MS on 04/06/2015, and consultation of MS on their priorities for the work of the EG on barriers to free movement of capital (16/10/2015) 2 Some MS based their replies on stakeholders' opinions, and did not express their official national views. 1

2 1. PERSISTING PROBLEMS The first barrier stems from administrative procedures, especially for investors active in several MS. The forms to be filled with tax authorities may not only vary radically it is estimated that there are 56 distinct forms in the EU but also change periodically. This was mentioned by MS as a major source of complexity in the relief process, also in view of additional language barriers. Secondly, though MS diverge in their speed of claim processing, most of them have a limited scope of on-line automation: it is often impossible for investors to complete the whole refund procedure online. Ease and speed of relief, thus, tend to be suboptimal especially as these parameters are not monitored by bilateral taxation treaties. Thirdly, most host MS still require reclaim procedures to be handled by local intermediaries, adding to home MS demands for investors to process their tax reclaims via domestic financial institutions. These conditions are especially burdensome, as in most cases foreign investors must claim refunds themselves and cannot delegate this task to their national financial institutions. Without a concerted effort by MS, the aforementioned barriers are likely to persist. Each national tax authority taken individually might lack incentives to simplify burdensome WHT refund procedures: putting in place streamlined relief procedures would at first take up administrative resources and (even though they should ultimately lead to savings in administrative resources) might be seen as potentially leading to a decrease of tax revenue in the short term. Yet, onerous WHT refund procedures hamper cross-border investment and impede progress of the single European securities market. They affect all kinds of financial instruments bonds, shares and derivatives and stakeholders: excessive compliance costs prevent retail investors from voicing claims and give rise to substantial administrative expenditures for institutional investors. Among all parties impacted, the EU asset management industry stands out as suffering from particularly high costs that can affect its competitive position. By and large, profits of funds and consequently costs to investors depend on scale benefits reaped from the diversification of risks: fund managers pool financial resources from a variety of investors, and invest them in a broad range of financial instruments across countries, leading to a more efficient allocation of capital. This loss to asset management funds is problematic, yet it constitutes only one of the many costs imposed by burdensome WHT relief procedures. In January 2016, the total costs of WHT refund processes was estimated at EUR 8.4 bn per year, including 6.03 bn in foregone tax relief (i.e. investors not claiming their tax refunds due to prohibitive compliance costs), 1.21 bn in costs related to the procedures and 1.16 bn in opportunity costs (due to the impossibility to use the money not yet refunded for other purposes). 3 These costs are a deterrent to cross border investment by both retail and institutional investors. Therefore, they have an adverse impact on the cross border flow of capital, going against the objectives of the CMU. 3 Source: Joint Research Center 2

3 Despite these sizable costs, and actions taken at EU 4 and OECD levels, progress has so far been limited. In order to finally resolve the issues connected to WHT refund, in the context of the Capital Markets Union (CMU) action plan, the Expert Group on barriers to free movement of capital has launched new discussions among MS focusing on national WHT practices. While any common WHT guidelines will have to be taken forward by EU and national tax experts (see section 3), the debates among financial experts, who are in direct contact with market participants, has so far allowed for a more precise mapping of the issues. 2. EXISTING SOLUTIONS AND GOOD PRACTICES IN THE MEMBER STATES Faced with this suboptimal situation, and as stressed by the Commission in its 2009 Recommendation on Withholding Tax Relief Procedures, an ideal situation would see all MS implement well-functioning relief at source procedures and, when not possible, establish quick and standardised refund procedures. Yet, at this stage, and for some MS in particular, intermediate steps towards this ideal situation seem to be a preferred way forward and more feasible in the short-term. Ultimately taking intermediate steps must contribute to a radically simplified WHT system. A study accompanying the 2009 Commission Recommendation showed that once MS had simplified their WHT relief procedures, they invariably experienced positive spill-over effects. FI and IE, for example, confirmed that after they implemented relief at source, refund processes worked more reliably and efficiently, reduced administrative burdens and freed up resources for alternative use both for tax administrations and financial intermediaries. Painting a similar picture, DE and NL reported that new electronic systems made their control mechanism more effective so as to significantly cut tax evasion in source countries. Several of these solutions to improve the efficiency of WHT procedures have already been put in place in a number of MS which should serve as a model for their peers. Figure 1 serves as impetus towards this end. It provides a comprehensive list of best practices excluding relief at source and, for each best practice, indicates one MS among those which could usefully share their experience on a peer-to-peer level. Figure 1: Best Practice Table Classic Reclaim Procedure Best Practice MS System in place Simplify documental evidence (e.g. allow other No additional info proofs than the certificate of residence issued by Sweden needed, but audit tax authorities, extend the certificate s validity to procedures in place more than 1 year) 4 Work at EU level resulted in the 2009 Recommendation on withholding tax relief procedure: 3

4 Set up a single point of contact for handling refund claims United Kingdom HMRC Large Business Double Taxation Treaty Team Helpline Replace claim forms by a single document Cyprus Yes Make claim forms available online Portugal Yes Allow completion of the whole refund process online Allow foreign financial institutions to handle the WHT procedure (i.e. no need to have a local agent see Giovannini barrier 11) Allow foreign financial institutions to claim relief on behalf of their clients Finland Estonia Lithuania Yes Under Certain Conditions Yes Quick Refund Best Practice Leader Model Have quick refund procedure in place (alongside classic reclaim and/or relief at source) Netherlands Yes Effectively provide refund in a short (< 6 months) period of Slovenia 7-30 days Scope of the WHT Best Practice Leader Model Restrict the scope of the WHT Croatia Yes Exempt certain investors from WHT (on types of financial instruments) Ireland All (many, e.g. interest payments made to companies resident in another EU MS) 4

5 3. THE WAY FORWARD Building on the work done so far and as part of the CMU action plan, Commission services intend to continue working with MS, in particular their tax experts to (i) foster further exchanges of good practices and monitor the evolution of national systems (ii) work towards a Code of Conduct on WHT relief principles. In the context of exchanging best practices, the Commission expects MS to take clear commitments on what national reforms they intend to implement and when Further exchange good practices and monitoring the evolution of national WHT systems The best practice table should serve as a basis for internal discussions between financial and tax authorities in each MS and inform further exchanges of good practices among MS. On the basis of the table, Commission services consider establishing a series of thematic indexes that would show where individual MS stand for each of the 9 good practices identified in the table (e.g. allow completion of the whole refund process online; effectively provide refund in less than 6 months). The 9 thematic indexes could then be merged in a general WHT index, which would allow for an accurate monitoring of the progress made by each MS. The Commission Communication on barriers to free movement of capital due by December 2016 presents an opportunity to invite and encourage MS to reach a certain level in this general WHT index, while retaining national flexibility in deciding which good practices MS want to commit to in 2017 and adopt by 2019 to improve the situation. For instance, one MS might start its reform process by simplifying documental evidence, while another might prefer tackling first the issue of allowing foreign financial institutions to claim relief on behalf of their client Work with Member States on a Code of Conduct for relief-at-source So far, the participation of financial experts in the MS has proven crucial in establishing an accurate state of play, taking account the views expressed by financial market participants and attempting to create a new momentum to tackle the WHT issue. Looking ahead to future work, however, several MS rightly pointed out that technical discussions on streamlined WHT procedures should be within the primary responsibility of tax experts. Therefore, in line with the CMU action plan, Commission services intend to work with MS tax and financial experts on a Code of Conduct on WHT relief principles. This Code of Conduct could be developed in a project group of interested MS, managed by DG TAXUD. It could potentially be complemented by an update of the 2009 Commission Recommendation or by supplementary, new Recommendations. 5

6 In order to kick-start this process, Commission services are also preparing a workshop in late 2016 / early 2017 with representatives from tax authorities, finance ministries and the private sector. 6