Finland's TRACE system establishes standard for EU WHT
The OECD's treaty relief and compliance enhancement package is being developed and tested for the first time by the Finnish tax administration, providing the sole current illustration of how the EU's new withholding tax system would operate.
The OECD's TRACE package, according to the head of tax at a financial services company in Germany, is designed to allow authorized intermediaries, mostly financial services companies, to securely deduct withholding tax (WHT) at source on portfolio assets.
According to him, "the system is supposed to remove administrative burdens on portfolio investors who are claiming reduced rates of withholding tax under treaties."
The TRACE system also makes it simple for intermediaries to transfer proof from earlier disclosures. To support a secure and dependable rebate procedure, it draws on elements of the EU's directive on administrative cooperation and uniform reporting standard.
To regain the trust that has been damaged by the "cum-ex" scandals, it is critical to demonstrate the reliability of information transmission under TRACE. The largest killer of trust between intermediaries and tax authorities, according to advisors, is dividend stripping scams, which cheated EU financial centres of billions of euros.
At the Financial Services Tax Conference hosted by Hansuke Consulting in October, Richard Collier, a professor at the University of Oxford Faculty of Law in London, stated that cum-ex still has an impact on the market.
He claimed that Cum-ex "produces too many tax credits, thus taking advantage of a flaw in the system."
Although receiving an advanced judgement on WHT refunds can be made easier using the TRACE reporting structure, there is still a lot of data needed to prove beneficial ownership and substance. Any issues the authorities have regarding the documentation may cause further delays in refunds.
The tax chief issues a warning that incomplete data may impair the cash flows of financial services organizations.
He emphasizes how crucial it is to gather all the required data beforehand.
The TRACE system is being tested and administered on Finland's digital platform, the first country in Europe to do so. The system accelerated refunds, but according to Finnish officials, it also revealed activity connected to cum-ex schemes that totaled € 80 million ($79.8 million) in tax fraud since 2021.
The TRACE package's contents are still being digitalized, according to Katja Pussila, risk manager at the Finnish Tax Administration, but the agency's initial experiences show the principles are effective.
"The scope of the system amazed us because more than half of the dividends that were tracked by TRACE received relief," she said.
"Retail investors were able to more easily get treaty relief, getting rid of low risk and small reclaims via TRACE, and we now have experience with the system to focus on the biggest funds issues," she continues.
Due to its ability to take into account quirks in several other reporting standards, like the US Foreign Account Tax Compliance Act, the TRACE package provides a flexible upgrade for data transmission.
"This is an IT project first and foremost, but we were able to standardise reports quite easily using the TRACE approach," according to Pussila.
The proof-of-concept digital TRACE model from the Finnish tax authorities is significant, according to Rebecca Willmott, executive director at JP Morgan in London, because it gives more investors access to treaty relief at source.
She continues, "One of the key benefits of becoming an authorised intermediary is to move to a relief-at-source approach that is a boon to asset management companies."
"It means less administration for us and more benefits for clients because they get faster services, so this was a big reason to sign up for TRACE Finland," she says.
"A number of industry groups have found the Finnish Tax Authority to be incredibly open and transparent and that has helped everybody wrap their head around this process," she claims.
According to Susanne Rauscher-Nwokedi, senior business analyst at Software Daten Service in Vienna, TRACE Finland customizations were most recently added to the company's reporting products.
According to her, "We have a decision process for every reporting regime in our system so the decision engine will evaluate a group’s uploaded transactions for different reporting regimes."
"The technology for TRACE was like other reporting regimes, so it was easier to implement," she continues.
"It took a year to design and program our systems to do what the Finnish tax authorities wanted, but we are in the reclaim process now and things seem smooth," she says.
The industry's calls for an EU-wide model by 2023 are being supported by the TRACE Finland success tales.
Distributed ledger technology (DLT) and improvements to the TRACE package are being combined by the European Commission to streamline the approvals procedure for EU-wide WHT claims and treaty relief in the upcoming months.
The DLT initiative is an excellent chance for the EU to take the lead in real-time claim evaluation, according to a tax leader at a multinational investment bank in Dublin.