It’s often said that the only constant in life is change, and that the only certainties are death and taxes. Withholding tax on investment income is undoubtedly one of these certainties, but the industry is on the cusp of momentous shifts in the way taxes are levied, recovered and tracked.
Withholding tax contributes considerable revenues to investment jurisdictions around the world but the landscape is changing. The complexity and rate of change is making it increasingly difficult for global investors to keep track of the tax consequences of their investment decisions while also minimising their withholding tax leakage.
The last 20 years have been filled with scandals against foreign tax authorities. For example, the Cum-Ex Scandal left tax authorities out of pocket when they paid out billions of Euros in fraudulent withholding tax claims. This has resulted in an ever-increasing burden being placed on the investor to prove their ultimate beneficial ownership and entitlement to investment income and the related withholding tax recovery opportunities. Tax authorities are rapidly amending documents needed to claim taxes withheld, in excess of double taxation treaty rates, and the process has become exceptionally onerous. In the last few years, we have seen many tax authorities, particularly the Danish, German and Swiss tax authorities requiring evidence of stock trade history, reasons for asset ownership and investor residence breakdowns for investment funds. The trend is increasing as more and more tax authorities recognise the need to improve document verification processes to certify beneficial ownership and treaty entitlement. Furthermore, the fight against tax evasion continues and the exchange of information is constantly increasing through FATCA, CRS, DAC6 and Exchange of Information agreements.
There are positive developments in the strides towards harmonization with increased focus on consistent documentation in support of corporate actions. ISO20022 is the main standardisation approach for cross-border payments and its implementation will affect the way in which messages are processed and ultimately, how withholding tax is tracked and applied. ISO20022 is expected to be fully adopted by the end of 2025 and its implementation will need to be carefully monitored.
Tax authorities are also starting to shift liability for correct withholding tax treatment to the custodian banks involved in the dividend payment chain. Finland is the first country to adopt the OECD’s Treaty Relief and Compliance Enhancement (“TRACE”) system, starting from 1 January 2021. The TRACE system aims to simplify the process for correct withholding tax treatment by ensuring tax is charged at the correct rate at the time of dividend payment. The onus is now on the relevant Authorized Intermediaries (e.g. custodian banks) to implement controls and information gathering procedures to verify the accuracy of information provided by investors and to withhold tax at correct rates. The outcome of Finland’s implementation of this system may determine whether other countries follow suit.
In addition, globalisation has made cross-border investment much simpler through ease of access to offshore investments and dual listed securities. Investors are becoming more aware of their rights and want to be treated similarly, regardless of where they are based. Court cases such as Aberdeen, Santander and Fokus Bank have set legal precedent for investors from all jurisdictions to be treated comparatively in similar situations which has markedly expanded the scope for withholding tax recovery. It’s imperative for investors to keep up to date with any changes and new opportunities they may present, to minimize the tax drag on offshore investments.
Finally, very few governmental institutions have not been impacted by the COVID-19 pandemic. At least from a withholding tax recovery perspective, there have been some positive developments. More tax authorities are welcoming electronic claim submission, claim submissions via online portals, the use of electronic signatures and soft copy documents. This simplifies the cost and time involved in the recovery process and creates efficiencies in claim processing timelines. In many cases, tax authority communication and their willingness to engage with external stakeholders has improved through meaningful dialogue.
At WTax, we believe these changes are promising as they show a commitment to a more effective and efficient global withholding tax infrastructure. Information, legislation and opportunities for maximising withholding tax recovery yields and minimizing tax leakage are ever-evolving and the need to monitor these developments has never been more crucial. WTax is committed to staying at the forefront of developments in the field of WHT. Partner with us today to ensure your benefit from all available opportunities for maximized investment returns through improved withholding tax management.