Tax authorities across the globe are continuing to redefine their tax processes with respect to cross border withholding tax relief procedures.
Many of these changes are often derived from recommendations made by either the Organisation for Economic Co-operation and Development (OECD) or the European Commission, for a harmonization of taxes. However, what we continue to see is divergence—the industry needs standardization, but tax authorities appear to be moving in the opposite direction.
Over the last 12 months, we have had to react to large amounts of tax reform across a number of global markets. Some of these are legacy issues that continue to present challenges to investors whereas others are new finance and tax bills aimed at strengthening domestic tax regimes.
When looking at these global changes there are common themes, such as the reaction of European member states to the OECD initiative, base erosion profit shifting (BEPS). In other cases, we have seen reactionary changes to less-than-positive media stories—which can be attributed to the current political climate and fears around globalization.
Trends among countries such as France, Belgium, Denmark and Germany have typically focused around measures to combat dividend arbitrage and tax avoidance, but this similarly isn’t just isolated to these states. We’ve also seen countries such as Indonesia move towards tightening up their tax regime with new anti-avoidance measures and re-defining tax beneficial ownership.
In the case of tax reform, no matter how big or small, documentation or processing changes will often go hand-in-hand. These changes in their initial stages can be quite disruptive to the industry as market participants consider the ramifications and seek to implement solutions for their clients.
In most cases, consultation phases would usually be the point at which industry bodies would voice the concerns of their members to governments and clarify or adapt changes accordingly for a seamless transition. However, in practice we have seen legislative changes implemented without full consideration of the practical application. While many challenges cannot always be foreseen, there appears a common theme that governments tend to implement changes and the force the industry adapt and accommodate these. This often leads to delays in tax relief processing from the period of the effective date of new legislation to the time in which guidelines are issued by a country’s Ministry of Finance.
Investors may view the tax impact as a web of processing changes across the globe. However, when we delve deeper into the OECD and EU initiatives around the tightening of tax regimes in a global economy, one of the key goals is to include “look-through” objectives to determine who the final investor is, their entity structure and residence. This key fundamental principal is the sought after solution for many tax authorities in their ongoing efforts to strengthen their tax regime and to ensure there is no abuse of the tax systems, which in the past, have failed to capture arrangements put in place to evade taxes and leading to the non-taxation of these select investors.
The primary issue with this is that each country has typically taken its own individual approach to the same objective. Each tax authority implements its solution based on its interpretation, instead of having a harmonized approach, which would itself lead to a more frictionless global tax society.
We are already experiencing the fourth industrial revolution, where Artificial Intelligence is in use, driverless cars are a reality and biology is merging with technology; but for withholding tax collection, we are somewhere around the second industrial revolution era — still working with paper.
The question is then: Where does the future of withhold tax relief lie? And how, in an environment of increased scrutiny on investors, does this translate to streamlined processes that lead to obtaining tax relief and reducing the amount of documentation required?
The conversations around digitizing tax relief mechanisms are growing, and whilst extreme solutions such as blockchain technology are being discussed as blue-sky in nature, these are also unfortunately several years away. So the question remains, what is being done at present? For domestic tax procedures, governments are a long way ahead of the industry. In the area of cross-border withholding tax relief, we are seeing a slow up-take of technology by governments in providing operable withholding tax relief solutions. That said, some countries are however, starting to lead the way on the initial stages of a digital revolution.
Countries such as Germany have long provided an e-filing method for certain reclaims – which while basic in nature due to the method of presenting and transmitting the data, is a preferred method of filing over long-form paper filing. This preference is due to the impact that e-filing can have on cash flows, as the returns on taxes are delivered back to investors in much more efficient time-frames.
However, we have only seen one country implement a full technology solution for filing reclaims to date—the Netherlands with its Digipoort system. This was a disruptive technology, but through varying levels of consultations with the industry, it allowed time for market participants to adopt and implement these changes, as BNY Mellon has done with our proprietary solution to utilise the Digipoort system.
Additional tax authorities are exploring the opportunities to digitalise tax filing processes, from the Austrian/German web-forms to Poland introducing e-filing methodologies. And while in their initial stages they may appear to add more complexities, we should see the technology develop over time and flourish into a sustainable solution.