In January, BNY Mellon hosted a live audio webcast on tax and regulatory landscape for 2019. Rohit Narula from EY and Jonathan Waters from BNY Mellon provided the latest updates and developments in the world of tax and regulations. Sophie Wong from BNY Mellon, moderated the discussion.
Once upon a time, investors could provide their tax service provider with a one-off signed general power of attorney and tax questionnaire, then sit back and reap the rewards of double taxation treaty rates without having to do much else. But those were the good old days. In 2019, investors face more challenges than ever to achieve optimal returns due to the ever-evolving global tax and regulatory landscape. Tax authorities around the world have made it increasingly difficult for investors to claim withholding tax relief on their investment income.
This evolution is not really a surprise given the numerous headlines over recent years of certain international multinational corporations participating in tax avoidance, abusing tax systems and double taxation treaties to gain significant benefits and double non-taxation of income.
In case of doubt, tax avoidance is operating within the letter, but not the spirit of the law, and it is entirely legal, whilst tax evasion is illegal.
Regardless of the technical legalities of tax avoidance, tax jurisdictions are clamping down on these practices as ultimately their bottom line and reputation is affected. As a consequence of the actions of a few, the many shall suffer, where several anti-abuse measures have been introduced on a global scale in order to prevent the future of tax avoidance. It is not only the big corporations who are impacted by these new regulations, investors big and small participating in cross border investments should pay attention and adhere to the ever-increasing stringent documentation and testing requirements, otherwise they will find their return on investment lower than expected.
The BEPS project initiated and endorsed by the G20 Finance Ministers in 2015 is one of the anti-abuse projects that has gained the most attention and traction internationally, in particular BEPS Action 6 on Preventing the Granting of Treaty Benefits in Inappropriate Circumstances. The minimum standards in Action 6 have already been or are in the process of being implemented in local legislation.
New and existing double taxation treaties are being negotiated and re-negotiated to include measures to mitigate treaty abuse; specifically treaty shopping with the introduction of subjective tests like the Principle Purpose Test (PPT) and/or Limitation on Benefits (LOB) provision. Investors seeking treaty benefits will have to pass these tests and in some circumstances seek pre-approval process in order to achieve optimal withholding tax relief on their investment income. Unfortunately or fortunately, depending on which viewpoint, countries are free to adopt the most convenient measures set forth by BEPS, therefore meeting the requirements of one bilateral tax treaty does not mean that you meet another. Convenient for the tax jurisdiction to pick and choose what suits them, not that helpful for the investor with numerous cross border investment markets having to navigate the differing requirements and tests to qualify for treaty benefits. Ultimately, investors need to demonstrate that there are no arrangement of transactions either directly or indirectly with the objective to obtain benefits from implementation of Double Taxation Agreement (DTA).
Aside from having to deal with the implications of the BEPS project, investors are also being faced with the recent fallout of an increasing number of European countries affected by fraudulent withholding tax reclaims in connection with so-called “cum/ex” trades. It has been reported that the tax authorities of Denmark have been cheated $2billion1 and Germany €5billion2, with Austria and Belgium also affected by this method.
Unsurprisingly, tax authorities around the globe hit by fraud and others who are afraid they may be targeted next like Indonesia, have responded by tightening up tax regimes, imposing more stringent legal provisions and supporting documentation requirements for withholding tax relief at source, exemption and reclaims. France, Poland, Belgium and Indonesia have all either proposed or enacted new anti-abuse measures to combat treaty abuse and withholding tax evasion on income within the last few months.
The enhanced measures ensures transparency; that treaty seekers are exactly who they claim to be and are not taking advantage of certain arrangements solely to benefit from a more preferential tax rate. Some of these measures include minimum stock holding periods, beneficial owner declarations, and increased substance requirements in obtaining a Certificate of Residence (CoR) from tax authorities – just to name a few.
So where does the investor go from here? Between increasing administrative measures, restrictions on income withholding tax relief and anti-abuse tax avoidance measures, the pace of introducing these regulations does not seem to be slowing down at all. Tax authorities are seeking to close out loop holes to ensure a more fair and robust tax relief system for all investors. Whilst the practical implications and procedures are being ironed out for newly imposed protocols, investors will have to deal with a period of uncertainty over what some of the new measures mean and what they have to do. One thing is for certain, investors will have to provide a multitude of disclosures and documents to obtain optimal tax relief on their investment income.
It may be seen as an inconvenience, but then again it is supposed to be double taxation relief, and not double non-taxation income.
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Vice President and Head of Tax and Regulatory Affairs, Asia Pacific
Sophie Wong is responsible for the provision of tax technical expertise, regulatory insight, client support, tax product development and enhancement for the Asset Servicing business at BNY Mellon in the Asia Pacific region.View Profile