The European Commission's proposal for a new EU system for the avoidance of double taxation and prevention of tax abuse, called Faster and Safer Relief of Excess Withholding Taxes (FASTER), has garnered substantial attention during its two-month public consultation, which concluded on September 18.
This proposal aims to streamline and harmonize the withholding tax (WHT) reclaims process across the European Union (EU) member states, with a focus on efficiency and speed. The responses to the consultation, which include feedback from individual investors and industry stakeholders, offer insights into the challenges and opportunities of the proposed changes and their potential impact on the EU's tax landscape.
Understanding the FASTER Proposal
The FASTER proposal by the European Commission represents a significant effort to address the complexities and inefficiencies associated with cross-border withholding tax reclaims within the EU. Withholding tax is a tax levied on income at the source, typically on dividends and interest payments. However, due to varying tax rules and procedures in different EU member states, investors often face challenges when seeking refunds of excess withholding tax.
The FASTER proposal is built on three key policy options:
Common Digital Tax Residence Certificate (eTRC) and Common Reporting: This option envisions the introduction of a common digital tax residence certificate that investors can use to claim multiple refunds during a calendar year. Additionally, it proposes a common reporting standard where all financial intermediaries along the financial chain report specific information to the source member state.
Relief at Source: Under this approach, member states would establish systems to apply reduced rates in double tax treaties or domestic rules directly at the moment of payment.
Quick Refund System: This option outlines a timeframe within which member states must process refund requests. It includes a provision requiring refunds to be processed within 25 calendar days from the date of the request or from the date reporting obligations have been met by certified financial intermediaries.
The FASTER proposal also introduces the concept of certified financial intermediaries (CFIs) and digital tax residence certificates (eTRCs) as central elements of the new system. CFIs play a crucial role in facilitating efficient tax reclaims by reporting information about taxpayers' eligibility for relief and the holding period of underlying securities. Additionally, eTRCs serve as digital certificates for tax residency and provide a standardized means of claiming refunds.
Stakeholder Responses to the Consultation
As of the consultation's closing date, the European Commission had received 227 responses, with individual investors making up a significant portion of the feedback. Spanish taxpayers, in particular, actively participated in the consultation, emphasizing the need for streamlining and harmonization of withholding tax processes across EU member states.
Some of the key points raised by stakeholders in response to the FASTER proposal include:
Zero Withholding Tax: Several respondents suggested that withholding tax should be reduced to 0% in the country of origin to eliminate the need for reclaims altogether. While this idea may simplify the process, it raises questions about the potential impact on tax revenue for member states.
Comparison to the US System: Some stakeholders recommended adopting a system similar to the United States, where non-US individuals and entities submit forms to the Internal Revenue Service to certify their foreign status. This approach streamlines the tax reclaims process by certifying eligibility upfront.
Impact on Investment Decisions: Investors expressed concerns about lengthy and cumbersome tax refund processes in certain EU jurisdictions, such as the UK. Some noted that they chose investments based on the ease of tax reclaims, which could affect investment flows within the EU.
Bureaucracy and Timing: Several respondents highlighted bureaucratic challenges and delays in obtaining tax relief through existing procedures. They emphasized the need for a more efficient and expedited system.
Additional Coverage: Some stakeholders advocated for extending the scope of the proposal to cover withholding taxes on royalties and license fees, pointing out similar challenges in these areas.
Reporting Requirements: The FASTER proposal's emphasis on reporting requirements, including holding periods and financial arrangements linked to securities, received attention. These requirements are seen as crucial in preventing tax abuse schemes.
Industry Insights: BSH Hausgeräte's Perspective
BSH Hausgeräte, Europe's leading manufacturer of home appliances, is among the few companies that have provided input on the FASTER proposal. The author of BSH's submission expressed frustration with the bureaucratic and time-consuming nature of the current withholding tax reclaim process. They suggested extending the initiative to withholding taxes on royalties and license fees, emphasizing the need for a more efficient and responsive system.
BSH's experience reflects challenges faced by many businesses in navigating the complexities of withholding tax reclaims across EU member states. The proposed reforms aim to address these issues by introducing standardized processes and digital certificates for tax residency.
The Path Forward: Potential Implications
The European Commission's FASTER proposal represents a significant step toward creating a more efficient and harmonized withholding tax reclaims system within the EU. If implemented, it could have several implications for EU member states, investors, and the broader tax landscape:
Efficiency and Streamlining: The adoption of a common digital tax residence certificate and streamlined reporting standards could significantly enhance the efficiency of the withholding tax reclaims process. Investors would benefit from simplified procedures and reduced administrative burdens.
Impact on Investment Decisions: A more straightforward and efficient tax reclaims system may influence investment decisions within the EU. Investors might be more inclined to allocate capital based on investment merits rather than tax reclaims considerations.
Revenue Implications: Reducing withholding tax rates to zero in the country of origin, as suggested by some stakeholders, could have revenue implications for member states. Striking a balance between simplification and revenue generation will be a key challenge.
Global Comparisons: The proposal's comparison to the US system highlights the need for international alignment in tax procedures. Lessons from other jurisdictions can inform the EU's efforts to create a more investor-friendly environment.
Preventing Tax Abuse: The reporting requirements and focus on financial arrangements aim to prevent tax abuse schemes like cum-ex and cum-cum. Effective monitoring and reporting can deter fraudulent practices
By fLEXI tEAM