On 19 June 2023, the European Commission published a legislative proposal for a Council Directive (hereinafter “the Directive”) that aims to make withholding tax procedures in the European Union (EU) more efficient and secure for investors, financial intermediaries and Member States.
The draft Directive, also referred to as FASTER (Faster and Safer Relief of Excess Withholding Taxes), was developed in response to the widely recognised need for simplification to the existing withholding tax relief procedures, balanced with a process that will provide tax authorities with tools to tackle fraud.
The Directive currently proposes that Member States bring into force the laws, regulations and administrative requirements necessary to comply with the provisions of the final Directive no later than 31 December 2026, for a 1 January 2027 effective date.
As part of the Commission’s adoption roadmap, a public consultation period took place from 19 June 2023 – 18 September 2023, during which various interested stakeholders provided their input on the proposed directive. WTax, together with many industry groups and representative companies, have submitted feedback. All feedback is publicly available including that which was submitted by WTax, and the Commission will summarise all feedback received for presentation to the European Parliament and Council with the aim of feeding into the legislative debate.
Exploring the rationale behind the implementation of FASTER
As outlined in the explanatory memorandum to the proposal, the existing withholding tax relief procedures in the EU, which non-resident portfolio investors are required to follow, are often complex, burdensome and expensive for financial intermediaries, investors and tax authorities.
However, work to try and address this is not new; regional and international discussions of withholding tax relief gained prominence in 2001 with the publication by the EU of the Giovannini Barriers. This report led to the creation in 2005, of the EU Clearing and Settlement Fiscal Compliance Experts’ Group (‘FISCO’) who were tasked with proposing workable solutions to remove fiscal compliance barriers to cross border post-trading in the EU, as highlighted in the Giovannini report Barriers 11 and 12, on withholding and transaction tax procedures respectively.
The final FISCO report was published in 2007 and in 2009 the Commission adopted a Recommendation on Withholding Tax Relief Procedures (COM (2009) 7924 final) forming the Tax Barriers Business Advisory Working Group who, in 2013, published its report recommending a framework to harmonise and therefore improve withholding tax procedures in the EU.
Meanwhile looking beyond the EU, the Organisation of Economic Co-operation and Development (OECD) commenced work to improve withholding tax relief procedures. Through collaboration with both government representatives and business experts, the OECD produced the report, “Possible Improvements to Procedures for Tax Relief for Cross-Border Investors”. The Committee for Fiscal Affairs (CFA) thereafter recommended further work in this area that resulted in the Treaty Relief and Compliance Enhancement (TRACE) initiative, essentially a system designed to standardise withholding tax relief procedures. On 23 January 2013 the CFA approved TRACE, but to date only Finland has adopted TRACE through its introduction of the regime with effect from January 2021.
Understanding FASTER’s Key Elements
The proposal aims to bring common elements to the existing withholding tax procedures, setting a framework for tax authorities, financial intermediaries and investors to follow.
Broadly these are:
- Common procedures for Member States to follow, allowing them to optionally introduce either a withholding tax “relief at source” or “quick refund” system for publicly traded securities.
- Mandatory registration for large financial intermediaries to be Certified Financial Intermediaries (CFIs), with an optional registration as a CFI for small financial intermediaries including non-EU FIs.
- Standardised reporting obligations on all financial intermediaries registered in a National Register of CFIs.
- Common due diligence procedures for CFIs through:
- Common EU digital tax residence (eTRC) – CFIs will be required to check the existence and veracity of the digital tax residence.
- Investor completed Beneficial Owner declaration (BOD) – BOD includes client representation that it is the Beneficial Owner of the income according to the source country law and declares that it has not engaged in a financial arrangement linked to the security that has not been settled, expired or otherwise terminated as at ex-dividend date.
- Civil liability standards, holding CFIs fully liable to any tax under-withholding.
- Standard Refund system to be harmonised – claims made will rely on reporting made by CFIs.
WTax’s Perspective on the FASTER Directive
As a global withholding tax service provider assisting institutional and retail investors in obtaining tax relief and retrospective tax recoveries pursuant to prevailing tax treaties or national legislation, WTax welcomes the European Commission’s FASTER Directive.
While the proposal sets out clear objectives, we believe to achieve its intended aims, the success of the Directive will depend on the operability of the system, particularly for complex cases.
In particular, the extent and scope of the due diligence procedures, the near-time reporting, changes to income and tax entitlement rules, and associated processes deciding whether to be a CFI, and if so, the scope of services to be offered, will be commercially challenging, particularly for small CFIs. Furthermore, it is unclear if financial institutions outside the EU will become a CFI.
Under FASTER, Member States are not required to grant relief at source or quick refund if an exemption under the double tax treaty (DTT) or domestic tax law is claimed. Additionally, FASTER does not seek to address solutions for investment funds to claim refunds under the European Court of Justice decisions (ECJ claims).
It is therefore likely that investment funds and pension funds may still have to file retrospective reclaims for a rate below the standard DTT rate of 15% and will still need to undertake litigation in certain countries to obtain ECJ claims.
In the longer term, considering the new civil liability standard that the Directive seeks to impose, and as CFIs seek to mitigate risks in areas of uncertainty, specifically surety about the absence of financial arrangements, it may very well result in certain client structures only being able to collect withholding tax relief via retrospective reclaim.
WTax will continue to track the progress of the FASTER proposal, contributing to discussions at both an industry and government level, ensuring we stay at the forefront of these developments and communicate on impacts to clients. While the Directive is welcomed and a positive step towards harmonised withholding tax processes across the EU Member States, it still remains unclear how the proposals will be transposed into successful operating models.
If you have any questions or require more information about FASTER or your withholding tax process in general, please get in touch with one of our regional specialists.
