EUROPE - The European Commission is attempting to push through yet more reforms to member states' withholding tax regimes by recommending a simplified system be introduced for investors claiming the tax relief.
Rows over the payments and right to claim withholding tax within European Union countries have been going on for some years now as many regimes have sought to give their local investors, such as pension funds, more favourable tax treatment, in contravention of EU cross-border trading laws.
The EC's stance until now has been to pursue each individual EU country which it regards as in contravention of the cross-border trading rules and order the government to reform legislation, to level the playing field for all investors.
And having pursued most countries and threatened legal action through the European Courts of Justice, the European Commission has now chosen to adopt a different tactic and argue member states should put electronic systems in place to make it easier for investors to claim withholding tax relief refunds.
A memo issued by the Internal Markets Directorate General has adapted recommendations from the EU Clearing and Settlement Fiscal Compliance Experts' Group suggesting it might be easier for investors to reclaim tax paid to local treasuries if the tax were applied at source rather than through refund, and if they were prepared to accept electronic rather than paper information.
The DG argued that many investors simply don't reclaim their share of the €5.47bn in foregone withholding tax annually because the procedures adopted to clarify their entitlements are so complicated they can on occasions discourage investors from applying.
Similarly, the cost of doing so is thought to amount to €1.09bn a year, so applying a risk-based approach to setting requirement of proof of entitlement and quick, standardised procedures (where relief cannot be provided at source) would go some way to cut the costs and the processes.
Charlie McCreevy, internal markets and services commissioner at the EC, said the intention was not to reduce security checks and revenue within member states, but ensure investors get access to the refunds or tax rates they are entitled to.
"If we are serious about promoting cross-border investments in securities in the Internal Market, EU member states will have to simplify their withholding tax relief procedures, so that foreign investors receive any tax refunds to which they are entitled more quickly and so that tax rules do not hinder financial instruments from getting involved in managing such cross-border investments," said McCreevy.
One of the key issues to be resolved is how intermediaries might be able to make claims on behalf of investors, especially where there is a chain of such intermediaries, and audit their compliance with EU requirements.
This latest shift in strategy follows years of activity by the European Commission to resolve the payment of withholding tax where double taxation agreements existed, and has at times ended with cases being heard in the European Courts of Justice.
The most recent countries to be targeted by the EU over its local versus overseas investor withholding tax bias were Denmark and Finland, as their tax systems still discriminate against overseas investors, such as pension funds, and give more favourable tax terms or refunds to local pension fund investors. (See earlier IPE story: EC takes action against Italy, Denmark and Finland)
Following action by the EC, pension fund investors themselves have also won the right in individual countries to reclaim the tax paid, as seen in a recent case heard in France. (See earlier IPE story: French supreme court acts on pension rebates)
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