COVID-19 Cross-Border Investment Withholding Tax Implications

COVID-19 Cross-Border Investment Withholding Tax Implications

May 2020

By Lorraine White, Sophie Wong

The widespread pandemic of the COVID-19 virus has impacted the way we live, work and conduct business globally in recent months. With most of the financial services industry and regulators alike working from home, investors and institutions are faced with new challenges to remain tax efficient.

 

But what are these new challenges and is there any light at the end of the tunnel? Lorraine White, Global Head of Securities Tax and Client Solutions at BNY Mellon explains.

Q: What are some of the key cross-border withholding tax challenges for investors and institutions as a result of COVID-19?

 

A: Withholding tax relief is a heavy, paper-based process driven by underlying requirements of tax authorities. Movement of physical documents presents challenges at the moment and the speed of the global shutdown has outpaced tax authorities. What we are seeing is that relief at source systems that are routinely available will be challenged simply because you cannot move a document as easily as you could before when you are having to rely on business contingency plans from all fronts.

 

There will be an inevitable impact on collecting tax documents where claims could take longer to process, or relief at source being missed leading to increased tax uncertainty - those are the biggest issues for investors.

 

Q: Some tax authorities have responded to the crisis by extending deadlines, but is that enough? Could you share what the local tax authorities around the globe are doing to alleviate these documentation issues?

 

A: Tax authorities have been redeploying resources to deal with domestic tax issues, so naturally less resources are allocated to deal with cross-border tax claims.

 

However, there has been good engagement from some tax authorities like France. They recently relaxed current requirements for original documentation until 15 July, meaning the French withholding agent can rely on scanned copies until originals can be provided. That is a great unilateral approach to help cross-border portfolio investors, but extending the deadline to 15 July may not be enough. BNY Mellon has pointed this out to the French Administration and they have indicated that they may be open to revisiting the deadline. This is a very good example of a good engaged tax administration. The Italian tax authorities have also made similar relaxations with reliance on scanned documents, but these relaxation of deadlines assume investors in the other country has the ability to send the document in the first instance. Unfortunately, we are not seeing the same outcome everywhere. We are continuing to have these conversations, and trying to keep the door open as we, like everyone, do not know when this pandemic situation will end. We are also mindful that easing of lockdown measures will vary in each country.

 

Q: Given the huge economic pressures, redeployed resources, possibly missed opportunities for relief at source and delayed reclaim payments, will we also see rejections of reclaims and further challenges by tax authorities?

 

A: Generally we would expect COVID-19 to impact reclaim payment timeliness, however, we do not expect tax authorities to reject claims due to the virus outbreak alone. We do not think it will change the way tax authorities look at entitlement rules, beneficial ownership etc.

 

Q: What has BNY Mellon been doing to help clients through this period?

 

A: BNY Mellon has quickly deployed resources not just for Business Continuity Plans but we also quickly initiated discussions with sub-custodians and tax authorities globally on the need for wet ink signature documents. The challenge is the perceived need for physical paper and documents globally and how we can remove the need for wet ink signatures. Unfortunately the responses across jurisdictions are mixed.

 

To assist clients, we immediately reviewed the list of BNY Mellon client documentation previously requiring wet ink signatures and allowed a number to be accepted electronically. Discussions with sub-custodians have also yielded positive results where we were able to negotiate acceptance of scanned copies with the original to follow. We have published the list of electronically acceptable documents on NetInfo and will continue to update the list, as well as advocating and challenging the market to further help our clients.

 

BNY Mellon also has been at the forefront of the industry body joint coalition letter to Organization for Economic Co-operation and Development (OECD) and European Commission that highlights many of the challenges and suggests a number of possible solutions. It is not going to be easy to get government bodies to change tax policy, but we believe solutions need to be multilateral because that is the only way to help all of our clients and the global nature of cross-border investment overall. Standardization is absolutely what is needed.

 

Q: So what do our clients need to consider in order to minimize disruptions to their tax services?

 

A: Clients should definitely review the various NetInfo in which we publish lists of documents that can be electronically accepted. They can also access this information via our Tax Documentation Reference Tool (TDRT) in NEXEN.

 

Think about how you can sign, scan and send documents, consider whether there are privacy concerns from your current working environment and make appropriate arrangements.

 

When posting physical wet ink signature documents, try to use a tracked signed courier service now that most national postal and international airmail services have been suspended.

 

The other thing to consider are accruals. Any accruals that are established may remain outstanding for a lot longer than is normally the case, so how to start preparing for that in terms of informing investors, boards and etc. These things will likely become the issues of the future.

 

Q: Looking into the future, any crystal ball insights you can give generally on whether the new emergency contingency plans we are all undertaking in the world of withholding tax may become business as usual in the future, will the tax authorities and sub-custodians ever become truly paperless?

 

A: BNY Mellon has proactively worked with our sub-custodians, connected with tax authorities and various trade associations, seeking practical alternative arrangements whilst the global pandemic restricts movement. Sadly, to date no single tax authority has agreed to the relaxation of the requirement for wet ink physical documentation, with the limited exception whereby they will accept government issued documents electronically (e.g. certificates of tax residency).

 

Most of our clients know BNY Mellon has long held the view that we need a paperless environment for onboarding and tax processes. I think we have an opportunity but the timing is not right from a global perspective. We need to do this and push talks with tax authorities that the world’s gone digital, so they should do the same. We would certainly be pushing for a more paperless relief process using COVID-19 as a very good example of why we should.

 

 

What we can be absolutely certain of in these times of uncertainty is that the cross-border withholding tax landscape has become even more challenging for investors as a result of COVID-19. Events are unfolding on a daily basis and only time will tell whether we can turn this very real threat into an opportunity to push for a more digital tax world to benefit all in the future to come. BNY Mellon continues to be proactive in this space and we look forward to working with market participants to guide them through these turbulent times.

 

 

Lorraine White

Global Head of Securities Tax Research & Client Tax Solutions, Tax & Regulatory

Sophie Wong

Vice President and Head of Tax and Regulatory Affairs, Asia Pasific

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