Operationally, the financial services industry has generally coped well with the impact of COVID-19. It dealt with market volatility and volumes with remarkably few problems while at the same time transitioning quickly to remote working.
While few people could have anticipated the almost wholesale shift to home-based working over a matter of days, it was made possible by the considerable investment many firms have made in recent years in operational and communications technology. However, it has not been without its difficulties, particularly in relation to tax and regulatory services. Some activities – such as those requiring physical paperwork or wet signatures – have proved especially challenging.
An example of this relates to the claiming of withholding tax relief in cross border portfolio investments. With some Tax Offices closed or with minimal in-office resources, some investors have been unable to obtain an original, current year certificate of tax residence (COR) from their home country tax authorities or have the relevant tax relief form stamped. While Tax Office employees may be able to work remotely, limited access to official stamps and concerns about data protection combined with disrupted postal services and the need for additional couriers, have meant certain activities have not been possible or are considerably delayed.
The knock-on effect is that those investors that have been paid with relief at source on preferential double tax treaty rates are subject to reversals of that income, resulting in foreign exchange exposures and the need to file retrospective reclaims. This also means an inevitable increase in tax reclaim volumes for some tax authorities already dealing with a backlog – should a reclaim route be available.
The investment industry has been rapidly shifting to a digital environment over recent years. Efficiency and accuracy have been the prime drivers but – as the COVID-19 crisis has proved – it has also done much to support resiliency. Indeed, it is digitisation that has enabled the investment industry to continue through a period of high activity while the vast majority of its employees work remotely. That would have been considerably harder to achieve ten, or even five, years ago.
While the industry has been steadily marching towards a digital environment, regulators and tax authorities have, in general, been moving at a slower pace. This is perhaps unsurprising. The digitisation of complex processes comes at a high upfront cost. But it has meant that the pinch-point for many investment industry processes is where they come into contact with regulators and tax authorities. This is not a new problem; COVID-19 has simply made that pinch all the more painful.
We are, however, seeing some increased flexibility by various authorities since the COVID-19 crisis. For example, the UK tax authorities (HMRC) has started to provide digital CORs which can be sent electronically to a resident investor and printed for use in a foreign market. While not accepted globally, HMRC has started to enter into agreements with treaty partners to secure the acceptance of these documents during the COVID-19 crisis. Polish withholding agents are allowing the use of digital signatures on documents. Digital signatures must be generated through a qualified certificate issued by a certification service provider based in an EU member state or that is recognised under a bilateral or multilateral agreement between the EU and third countries. Unfortunately, certain documents still require notarisation, which is not generally a digital process. Many other markets (more than 25 tax authorities as of 1st of June) are accepting scans as contingency – but will require the physical documents to be delivered after the pandemic is declared over. Many of them are also accepting digital and electronic signatures (about 20 for relief at source, while only 12 for reclaims).
Interestingly, the EU is advancing the digital agenda for signatures with the eIDAS Regulation (Regulation (EU) No 910/2014), evolved from the Directive, yet not all tax authorities and regulators seem to embrace this.
The increased flexibility to deal with the COVID-19 crisis and its immediate aftermath is to be welcomed. But these are temporary fixes. The question remains whether the crisis will encourage tax and regulatory authorities around the world to embrace digitisation more wholeheartedly. Until they do, the investment industry is limited in how far it can unlock the full benefits of digitisation, including technologies such as artificial intelligence, machine learning and distributed ledger. Moreover, the industry will be reluctant to invest in new processes until tax and regulatory authorities also buy into digitisation. The good news is that tax authorities, supranational bodies and industry are already discussing the challenge and collectively thinking about the use of advance technologies such as distributed ledger as a potential alternative solution.
The COVID-19 crisis has enabled and encouraged many of us to think differently about many aspects of our lives. For the investment industry, it has clearly shown the value of greater digitisation – not just to enhance efficiency but for creating a more robust and resilient infrastructure. As the saying goes, “never let a good crisis go to waste”. The impact of COVID-19 could be the stimulus to accelerate to drive towards digitisation of tax and regulatory in financial services.
Mariano Giralt is Global Head of Tax and Regulatory, BNY Mellon Asset Servicing. The views expressed herein are those of the author only and may not reflect the views of BNY Mellon.
Global Head of Tax & Regulatory, EMEA Digital Lead and Head of London Site
Mariano Giralt, Managing Director, is the Global Head of Tax & Regulatory, EMEA Digital Lead and Head of London Site. Prior to joining BNY Mellon, Mariano worked as Director at JP Morgan Chase Treasury & Securities Services. Prior to this, Mariano was a Senior Lawyer at Cuatrecasas Law Firm.View Profile