In late September 2021, the European Commission released a proposal to introduce a holistic, European Union-wide solution to govern withholding tax relief and recovery for non-resident investors. The project’s stated objective is to facilitate efficient cross-border investment while preventing tax abuse. As an initial step in a multi-phase process, the Commission has opened a feedback window to provide citizens and stakeholders the opportunity to comment on the roadmap.
As a company guided by the vision that “No Investor Overpays Withholding Tax,” GlobeTax is monitoring the Commission’s efforts with great interest. After thirty years as the leading independent provider of withholding tax recovery services, we know first-hand the challenges of navigating the divergent and complex tax relief and recovery procedures in many European Union member states.
Despite the burdensome nature of the current system, overhauling it is not easy. Indeed, over the past several decades, we have reviewed and participated in several harmonization initiatives including the Giovannini reports in 2003, European Commission recommendations in 2009, TRACE in 2013, and EU Code of Conduct in 2017. Although the proposed solutions differed and were implemented with varying levels of success, we nonetheless appreciated their spirit and alignment with our corporate vision.
To do our part to manifest this vision of widened accessibility, we have historically worked closely with tax authorities to develop streamlined and digitized solutions. Examples of such efforts include devising and implementing a relief at source process for Japanese ADRs, consulting on the Netherlands’ electronic filing initiative, and supporting Finland in implementing TRACE. As the European Commission’s newest initiative moves forward, we are hopeful that elements of our past solutions – relief at source with reduced documentation, adoption of digital procedures, and form standardization – are included in the overhaul. In our ideal world, the Commission’s proposal would also include reporting from tax authorities on outstanding claims, as well as a requirement to pay claims within three months.
To be sure, broader and streamlined access to tax entitlements must be balanced with rigorous validation to ensure that investors filing claims are entitled to reduced tax rates. Issues like double claiming, over-claiming omnibus positions, and filing on stock loan positions demonstrate the challenges involved in determining the correct claimant. In many instances, neither the investors nor the tax authorities are ideally positioned to perform this validation. As a result, financial intermediaries become responsible for substantiating investor identity, and implement additional requirements to mitigate the risks involved. Because each financial intermediary interprets risks differently, these added measures are not uniform and perpetuate divergent requirements across markets, adding further complexity to the process.
Ultimately, while we believe that systemic solutions like multilateral regulatory changes or distributed ledger technologies can address withholding tax challenges, we also recognize that widespread adoption can take years (or decades). And, as these projects indicate, investors today have an acute need for support in gaining relief from cross-border withholding. Thus, as the community continues the work on the next generation of solutions, we will continue to assist clients in reclaiming the billions of euros over-withheld each year – funds that are subject to the ever-present threat of expiring under statutes of limitation.