EU Commission launches public consultation on withholding tax claims

The EU Commission has published a Public Consultation on its initiative to introduce a common EU-wide system for withholding tax claims on dividend and interest payments within the EU. The Public Consultation will run until 26 June 2022.

Cross-border investment and simplified taxation are a priority for the EU. Despite the measures taken to remove tax barriers to cross-border investment, the Commission considers that obstacles remain. This initiative aims to introduce a common EU-wide system for withholding tax on dividend or interest payments. It will include a system for tax authorities to exchange information and cooperate with each other.

Background

The Commission’s Action Plan for fair and simple taxation supporting the recovery, published in 2020, included as one of its many tax-related proposals, the introduction of a common, standardised EU-wide system for withholding tax relief at source coupled with a new exchange of information and cooperation mechanism between tax administrations, with the dual aims of both significantly lowering tax compliance costs for cross-border investors and also preventing tax evasion.

In September 2021, the EU Commission launched its review into the possible introduction of a common, EU-wide system for withholding tax relief with the publication of a roadmap for feedback. The publication of the Public Consultation is the next stage in this process.

What is the problem?

The issue identified by the Commission is essentially the burdensome withholding tax relief procedures for cross-border investors in the securities market and, in particular, smaller cross-border portfolio investors.

The Commission point out that when an EU resident makes an investment in securities in another Member State, the payments received in return (either dividends or interest) are normally subject to a withholding tax in the country of the investment (source country), at a rate which is often higher than the reduced rate on the basis of an applicable bilateral Double Taxation Convention (DTC). Where this applies, in order to eliminate the double taxation, the non-resident investor is then required to submit a refund claim of the excess tax withheld by the source country. These withholding tax relief mechanisms are regarded as lengthy, resource-intensive and costly for both investors and tax administrations due to the lack of digitalised procedures and the existence of complex and divergent forms across Member States. In some cases, these high costs result in non-resident taxpayers foregoing their right to apply for the tax treaty benefits that they are entitled to, thereby leading to double taxation and as a consequence to less attractive net returns than for domestic investments. The existence of inefficient, burdensome and costly procedures for the recovery of excess tax paid in a cross-border context discourages cross-border investment in the Union.

On the other hand, the Commission also notes that the current procedures can be abused as shown recently the existence of an alleged large-scale tax fraud known as “Cum/Ex” scheme and “Cum/Cum” Scheme in some EU Member States, especially Germany. It is notable however that the Commission papers do not make clear how an EU-wide system would prevent such a situation, arising from loopholes within national law, arising. It carries the implication, at least, that certain fundamental underlying rules – such as the question of beneficial owner – would need to be determined at an EU rather than national level.

From the point of view of the Capital Markets Union, inefficient withholding tax relief procedures are one of the main barriers that deter people to invest across borders and hence to free movement of capital and capital market integration. In particular, burdensome procedures for withholding tax have long been identified as a barrier to achieving a single European securities market, undermining investment within the EU.

What is the Commission proposing?

The review is at an early stage and, as such, does not put forward any concrete proposals as yet. However, the Commission does indicate three options that will be considered as part of the review.

Improving withholding tax refund procedures to make them more efficient: This option entails the implementation of several measures, the objective of which is to simplify and streamline withholding tax refund procedures by making them quicker and more transparent.. These measures are not limited by but could include: the establishment of common EU standardised forms and procedures for withholding tax refund claims irrespective of the Member States concerned and the obligation to digitalise current paper based relief processes.

Establishment of a fully-fledged common EU relief at source system: This option entails the implementation of a standardised EU-wide system for withholding tax relief at source whereby the correct withholding tax rate, as provided in the DTC is applied at the time of payment by the issuer of the security, to the non-resident investor thereby not incurring double taxation

Enhancing the existing administrative cooperation framework to verify entitlement to double tax convention benefits: This option envisages a reporting and subsequent mandatory exchange of beneficial owner-related information on an automated basis, to reassure both the residence and source country that the correct level of taxation has been applied to the non-resident investor.

What are the next steps?

The public consultation runs until 26 June 2022. After this, the roadmap envisages that any recommendations would be put forward in the fourth quarter of 2022, most likely involving the publication of a proposed Directive.

The reforms considered by the proposal are far reaching and may have significant implications for both taxpayers, intermediaries and businesses which hold investor information. Whilst the aim of simplifying and facilitating the process for double tax relief is laudable, the enhanced reporting requirements may auger significant administrative burdens for those who currently hold and process investor information. It will be important for all stakeholders to take an active part in the consultation process.