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2023 | Buch

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Cross-Border Investment Withholding Tax

A Practical Guide for Investors and Intermediaries

verfasst von: Ross K. McGill

Verlag: Springer International Publishing

Buchreihe : Palgrave Macmillan Finance and Capital Markets Series

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book provides a clear and concise explanation of withholding tax and how to leverage best practice to generate improved investment performance. It gives practical guidance to financial service firms and investors to help them understand the issues involved, trends and practicalities of maximizing returns on investment.
Most of the $200 billion of withholding tax lost by investors annually is due to lack of awareness and not asking the right questions of their brokers and custodian banks. Financial institutions are also increasingly being held to a higher standard by investors for provision of withholding tax services because of the impact it can have on portfolio performance. This book seeks to raise awareness of the issues and provide more detail about how the system works and what challenges and changes readers should expect in the future.

Inhaltsverzeichnis

Frontmatter

Essentials

Frontmatter

Chapter 1. Introduction

Abstract

It is an accepted truism that there is nothing certain in this life other than death and taxes. It is also a truism that, in the world of tax, the answer to every question starts with two words—“It depends”. With that in mind, we are about to embark on a story that will become more detailed as we proceed. For now, we need to understand the core concepts and principles.

Ross K. McGill

Chapter 2. Principles

Abstract

This chapter establishes what cross-border withholding tax is and why it is important. Withholding tax, in the context of this book, will be the tax withheld on passive investment income when paid to a recipient that is resident in a jurisdiction that is different from that of the Issuer of the security on which the payment is based. In most cases, this will be dividends on equities or bond interest paid on fixed income instruments. The chapter will explain the international context (double tax treaties), the operating models (relief at source, quick refund, and standard refund) and then spend some time describing the types of financial instrument covered, the types of recipients (beneficial owner) and introduce the reader to the principles that make this area of taxation simultaneously extremely valuable and extremely complex and challenging.

Ross K. McGill

Chapter 3. Context

Abstract

This chapter establishes the context in which the withholding tax industry operates. As a sub-set of corporate actions, financial institutions (and vendors to them) are at the centre of the industry as the only actors that have all the information necessary to optimise their customer’s tax position. The chapter establishes the amount of tax that is withheld on cross border investment income, what proportion is overwithheld and what proportion is ever recovered to an investor. The chapter also introduces some of the challenges faced by governments, financial institutions and investors based on the way that taxes are levied on cross-border transactions.

Ross K. McGill

Chapter 4. Variability

Abstract

This chapter builds on the previous chapter by explaining the number and type of variables involved in a cross-border investment scenario from a tax perspective. 5700 double tax treaties, each with their own rules, forms and processes are the start point. The legal availability of one or more of the tax processing models comes next (relief, quick refund and standard claims). The key data and documents necessary, the time frames and the nexus of these to provide correct taxation is explained in order that the reader has a good grasp of the complexity faced by financial institutions and investors when processing cross-border transactions.

Ross K. McGill

Chapter 5. The Pace of Change

Abstract

This chapter frames the rate of change in the industry to highlight the increasing pace of change. In the thirty years between the first OECD Model Tax Convention and the second one, we landed a man on the moon, invented the internet, mobile phones, touch screens, databases and spreadsheets. In the last ten years anti-tax evasion has become the predominant driver of tax policy, tax relief at source is being adopted as the primary accepted processing model and we have digital documentation being accepted instead of paper.

Ross K. McGill

Operational Models

Frontmatter

Chapter 6. Tax Relief at Source

Abstract

This chapter explains the principles of tax relief at source in which tax documentation, certifications and positional data must reach a nexus between the record date and pay date of a securities distribution before tax relief can be granted. It also highlights the fact that future changes in digitisation and legal frameworks (covered elsewhere in the book) will make this operating model increasingly the de facto preferred model for tax authorities. So, investors and financial intermediaries need to get ahead of this curve in their planning. This chapter also compares some of the current tax relief models which will be described in more detail in Part III.

Ross K. McGill

Chapter 7. Quick Refunds

Abstract

This chapter explains the principles of quick refunds in which, if legally permissible, a financial institution can grant tax relief after a payment has been made (net of statutory rates of tax) by deducting the tax from funds it is due to remit to its tax authority. The chapter explains the process and the legal framework necessary to allow this operating model which provides an additional window of opportunity to investors in certain jurisdictions.

Ross K. McGill

Chapter 8. Standard Refunds

Abstract

This chapter explains the “backstop” process of standard refunds in which withheld tax is in the possession of the tax authority. The chapter explains how the process of tax reclamation works and establishes the various documents and data requirements as well as the nuances. This chapter also references other chapters to highlight that while standard refunds were the main operating model in the past (tax relief being uncommon), they will become “boutique” in the future, reserved only for the most complex of transactions, as the industry moves towards a primary tax relief operating model. Key concepts include use of certificates of residence, self-certifications, problems associated with chains of intermediation in the payment chain, lack of standards, lack of automation, inaccuracies in data, limitations of custody tax offerings and cost–benefit calculations.

Ross K. McGill

Chapter 9. Reporting

Abstract

In this chapter I will explore the new field of tax reporting. Cross-border investment withholding tax has, historically, not been the subject of reporting. Once a tax reclaim or claim of relief had been granted, there was no further action needed by intermediary or investor. The advent of anti-tax evasion regulations has had an effect on this and begun a trend towards reporting of tax relief and tax reclaim reporting so that tax authorities can effectively “join the dots”. The US began this with 1042-S reporting and is generally included as a concept in the TRACE framework as well as the EU Code of Conduct. Financial institutions spend enormous resources gathering and checking data for reporting to their domestic and now foreign tax authorities. This raises important questions about legality of collection and data protection, both of which will be explored in this chapter.

Ross K. McGill

Chapter 10. Governance and Enforcement

Abstract

As tax relief becomes the predominant tax processing model for cross-border investment, which effectively transfers tax withholding and reporting obligations from a tax authority to a financial institution), tax authorities increasingly want some level of oversight and enforcement capability. This chapter looks at how tax administrations require the appointment of a Responsible Officer to oversee specific compliance to their regulations, annual reporting, auditing, certifications and penalties—all tools of governance that tax administrations are starting to impose to ensure proper compliance.

Ross K. McGill

Practical Implementations

Frontmatter

Chapter 11. United States of America

Abstract

This chapter describes and updates the US withholding tax regime characterised as the Qualified Intermediary Program. The US market represents 55.9% of all global securities by value. Significant updates include new form revisions, impending new Chapter 1 Section 871(m) regulations coming into force in January 2023. The chapter describes the operational processes of documentation, withholding, depositing of tax and reporting together with the governance cycle of periodic reviews and certifications. The chapter will also highlight common problems that lead to penalties.

Ross K. McGill

Chapter 12. 871(m), 1446(a) and 1446(f) Withholding

Abstract

In this chapter, I will explain some of the more recent changes in withholding tax in the US securities market. In particular I will address Chapter 1 Section 871(m) that deals with the tax treatment of derivatives, Chapter 3 Section 1446(a) that deals with distributions of partnerships and finally Chapter 3 Section 1446(f) that deals with gross proceeds withholding on publicly traded partnership trading.

Ross K. McGill

Chapter 13. EU Withholding Tax Code of Conduct

Abstract

This chapter describes the history and the current state of the European Withholding Tax Code of Conduct that parallels the OECD TRACE initiative and had its roots in the work of Alberto Giovanini, the European Commission FISCO group and latterly the European Commission Tax Barriers Business Advisory Group. The Chapter describes the ten principles of the Code focusing on issues that can lead to automation and standardisation of tax policy in Europe.

Ross K. McGill

Chapter 14. OECD Tax Relief and Compliance Enhancement

Abstract

This chapter describes the OECD Tax Relief and Compliance Enhancement protocol in general terms. TRACE is a framework that allows tax administrations to adopt a standardised tax processing model with primary focus on relief at source. TRACE uses the concept of authorised intermediaries to allow tax administrations to outsource tax determinations under AI contracts. This is supported by the principles of using self-certifications of residency to replace certificates issued by tax authorities and annual reporting. The system has many similarities to the US QI Program but has been adapted by the OECD to simplify and standardise the model for global use.

Ross K. McGill

Chapter 15. FinlandFinland

Abstract

Finland is the first country to have adopted the TRACE protocol, having spent two years adapting its legislative framework to allow it to change to a tax relief at source model. The chapter will draw heavily on contributions from the Finnish tax authority, Vero Skatt, to provide context to the challenges faced by tax administrations seeking to follow their lead. The chapter will also look at the participation rate of the Authorised Intermediary system in Finland and some of the practical challenges and opportunities for financial institutions.

Ross K. McGill

Impacts of Tax Evasion and Fraud

Frontmatter

Chapter 16. FATCA

Abstract

This chapter describes the framework Title V of the Hiring Incentives to Restore Employment Act (2010), usually referred to as FATCA. FATCA imposes obligations on all non-US financial institutions to report accounts held by US Persons (or presumed US persons). The FATCA framework is enforced using intergovernmental agreements (IGAs) and has had a significant impact on the ability of Americans to open or maintain financial accounts outside the US. FATCA includes due diligence rules for financial institutions to establish. Reportable accounts, IGA terms that establish what data is to be collected and how it is to be transmitted to the IRS. The nexus to withholding tax is created by the enforcement and deterrence component of the regulation that forces financial institutions to penalise anyone not complying with FATCA by withholding 30% of USA-sourced income paid to such accountholders and reporting such through the US tax system.

Ross K. McGill

Chapter 17. AEoI/Common Reporting Standard

Abstract

This chapter describes the way in which OECD has developed a framework for its member states under which tax administrations can share information about each other’s financial institutions and accounts held at those institutions by their partner jurisdictions tax residents. Where AEoI is the mechanism by which partner jurisdictions share information, the Common Reporting Standard (CRS) describes the method by which the financial institutions in partner jurisdictions must go about identifying and reporting their foreign resident account holders to their domestic competent authority. This chapter describes the legal framework of AEoI and CRS as well as the due diligence and reporting mechanisms used.

Ross K. McGill

Chapter 18. DAC6

Abstract

This chapter describes the European Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU more commonly known as DAC6. DAC6 is intended to catch those cross-border arrangements that could be used to evade CRS. DAC6 defines the hallmarks of a cross-border arrangement that might represent evasion and thus be reportable. DAC6 also defines those parties who must report such arrangements if they become aware of them. This chapter describes the hallmarks and the procedures that firms and practitioners must be aware of to avoid liability and risk.

Ross K. McGill

Chapter 19. Tax Fraud

Abstract

The Danish tax authority has filed several lawsuits since 2018 claiming $2 billion of fraudulent withholding tax claims were made and paid to over a hundred defendants in the period 2012–2015. These fraud claims highlight weaknesses in the tax system. This chapter shows how these scams worked and what the tax authorities have done about it since (i) in chasing them perpetrators and (ii) changing the rules of tax reclaims in response. The chapter also discusses the wider implications of this type of fraud on the reputation of financial institutions and tax administrations. This chapter is also useful for investors to understand the degree to which tax planning can easily cross a line into tax evasion and even fraud.

Ross K. McGill

Technology

Frontmatter

Chapter 20. ISO Standards

Abstract

This chapter explores the current state of standards in the industry, as a prerequisite to automation, in relation to withholding tax. The International Standards Organisation (ISO) appointed the Society for Worldwide Interbank Telecommunications (SWIFT) to police ISO standards in financial services. The chapter looks at what standards currently exist (ISO15022) and the transition to a new standard (ISO20022). Particular emphasis will be given to (i) how tax processing will be affected by the transition of the message-based model of ISO15022 to the business process model of ISO20022 and (ii) the specific tax tags that are available.

Ross K. McGill

Chapter 21. Platforms

Abstract

Many financial institutions and third-party vendors in this space now have platform-based web technology in place to provide their customers with a seamless, single and integrated source of information. Withholding tax has been late to this party, but there are now several notable platforms available that improve efficiency and compliance in withholding tax processing. GlobeTax’s MIDAS platform, GOAL’s Adroit platform and TConsult’s Tax Compliance Toolkit™ are three that will be described.

Ross K. McGill

Chapter 22. Getting Rid of Paper

Abstract

In this chapter I will describe the challenges of documentation required for every withholding tax claim, whether it be relief at source, quick refund or standard refund. Any kind of claim is based on (i) evidence of who the beneficial owner is, (ii) evidence of their ownership of the securities involved, (iii) evidence that they were subject to taxation. In many cases, due to the issues described in Chapters 17 and 18, evidence is also required to prove the trail of ownership leading to the claim position. This chapter will identify each of these components and discuss the new initiatives and technologies that are being brought to bear to remove paper from the process.

Ross K. McGill

Chapter 23. Withholding Tax on the Blockchain

Abstract

In 2021 Ernst & Young announced that they had successfully trialled a proof of concept for withholding tax processing using Distributed Ledger Technology (DLT). This chapter explains how this would work in a large-scale environment, explores some of the challenges.

Ross K. McGill

Performance

Frontmatter

Chapter 24. Benchmarking

Abstract

This chapter describes each step of the withholding tax process and establishes methods for calculating a benchmark of performance for financial institutions. Investors will also find this useful because it highlights the questions they should be asking of their financial institution (or third-party vendor) to establish the parameters and expectations of their service offering.

Ross K. McGill

Chapter 25. Portfolio Performance

Abstract

This chapter provides mathematical modelling of tax processing to show how much value can be added to an investment portfolio as a result of tax optimisation processes such as relief at source and standard reclaims. It uses some of the techniques described in the previous chapter to identify risks and how to minimise them. It will also describe non-optimal but common tax processes that delay the delivery of portfolio value, thus providing investors and financial institutions with a guide of what to look out for.

Ross K. McGill

Chapter 26. Tax Is a Product, Not a Task

Abstract

This chapter describes the different approaches taken to withholding tax processing be financial institutions as opposed to third-party specialist vendors. The former tend to treat tax processing as a necessary evil, a task, while the latter treats the subject as a product. This leads to very different experiences for investors who may not understand the effect. This chapter should also act as a highlighter for financial institutions to show them how to improve their tax offerings.

Ross K. McGill

The Future

Frontmatter

Chapter 27. Digitisation of Tax

Abstract

While transmission methods may advance, using DLT and other technologies and securities themselves become digital, some aspects of tax have heretofore been intractable to standardisation and automation. This chapter explores some of the ways in which those intractable issues may be solved. Not least of these will be digitisation of documentation for self-certifications of residency, the use of non-fungible tokens to represent tax reclaims, smart contracts to allow more efficient outsourcing and the use of high-technology vendor solutions by financial institutions to reduce cost and risk.

Ross K. McGill

Chapter 28. Vendor Dynamics

Abstract

In late 2022 I accepted an invitation to join the advisory board of RAQUEST GmbH, a subsidiary of Halvotech GmbH. I had been the managing director of GOAL so, I had relevant experience in withholding tax on which to call in order to support RAQUEST in their strategic planning. RAQUEST is a software vendor that licenses its software to financial institutions and institutional investors so that they have better tools to manage the tax relief and reclamation processes. In this chapter I have collaborated with RAQUEST’s CEO, Alexander Lerch to explore why software solutions work in this sector, what they bring to their users and why a firm would use software rather than outsource.

Ross K. McGill

Chapter 29. Future of Tax Reclamation

Abstract

As tax relief at source under TRACE, the Code of Conduct and the US Qualified Intermediary program all become the dominant cross-border tax processing models, the classical post pay date tax reclaim made to a tax authority will become increasingly boutique. This chapter explores the future of the post pay date tax reclaim and identifies whether and where this business will be viable for investors or for financial institutions.

Ross K. McGill

Chapter 30. Conclusions

Abstract

We have come a long way in this second edition. The concepts have not changed, but the way in which they are implemented is changing more and more rapidly. I am happy to share my thoughts about the direction of the industry.

Ross K. McGill

Backmatter

Titel: Cross-Border Investment Withholding Tax
verfasst von: Ross K. McGill
Verlag: Springer International Publishing
Electronic ISBN: 978-3-031-32785-8
Print ISBN: 978-3-031-32784-1
DOI: https://doi.org/10.1007/978-3-031-32785-8