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Taxation and Customs Union
Newsletter30 June 2023Directorate-General for Taxation and Customs Union

New withholding tax procedures making life easier for investors

On 19 June, the European Commission proposed new rules to make withholding tax procedures in the EU more efficient and secure for investors, financial intermediaries and Member State tax administrations.

For this month’s interview, we spoke to Marc Clercx and to Lourdes Bustos, the TAXUD officials who helped design the new procedures, and asked them to explain why the new rules were needed and how they will help businesses and tax administrations. 

Marc Clercx & Lourdes Bustos

What are these problems that the Commission’s withholding tax proposal is trying to tackle?

Lourdes:

I think that there are three main problems currently with the withholding tax procedures.  

First,  the uneven digitalization across Member States when it comes to tax procedures. In many countries, we have paper-based procedures and even a tax residency certificate that requires wet ink to be accepted by the tax administration. So that is one of the drivers.  

The second is the fragmentations in the regulations in Member States. Each Member State has its own withholding tax procedure, with its own requirements. There are more than 450 forms in different languages for the investors to have to fill across Europe.  

And I would as well highlight the lack of transparency within the financial chain. There are many financial intermediaries in the financial chain, which makes it very difficult for the source tax administration to know who the final investor is.

So, these main drivers lead to inefficient withholding tax procedures and can lead to abuse. 

How much were businesses losing every year in monetary terms as a result of these inefficient procedures? 

Marc:

Well, according to our estimates and that of the Commission’s Joint Research Center, we calculated the amount lost by investors to be around EUR 5 billion. On top of that, we also understand from research done by a German university that has looked specifically at fraud that over a period of 20 years, something like EUR 150 billion was lost in revenue for a large part of the EU Member States.  

Is this related to Cum/Ex and Cum/Cum scandals? 

Marc:

Exactly. So, we're still talking about quite a lot of money. And we hope, of course, that by speeding up and making the process more efficient, that the costs that investors face will go down. And given that it is so burdensome, they will also start investing more cross-border, and not only in their own country. 

So what does the proposal actually entail? 

Lourdes:

It entails two main building blocks, I would say.

The first one would be to set up a digital EU-wide taxation certificate which would accommodate common content, a common cover period for all Member States and a common technology as well. We want to harmonize taxation certificates in terms of format but also in terms of procedure to be able to issue them in one working day . However, the decision concerning one taxpayer being tax resident in one country or another, is still in the hands of the tax administration of each Member State. That would be the first building block

The second one would be setting up two standardized procedures across Europe. The first procedure is the relief at source, which means that the correct amount of money will be withheld from the beginning, when the dividend or interest is paid. And the second one is a quick refund system, which entails that the refund would take place within a maximum of 50 days. 

As you were talking about digitalization, would national authorities have to implement new IT systems?

Marc:

In principle, all tax authorities will have to make adjustments to their systems to allow further automation. 

But given the fact that we have to deal of course, with multiple Member States, we will also, within the proposal, agree on common IT standards. So that there is one standard for the whole EU, making it both easier for the tax administrations among themselves to say yes, we can accept, for instance, the security standards, and that's predominantly related to the tax residency certificate or ETRC as we are now going to call it, but also for the reporting. We will establish a common reporting standard as part of the fast-track approach. And we would also want to create one common standard from an IT perspective. But it is still going to all the relevant Member States, so we will not have one central point. 

I saw that the proposal was really well received among businesses. How have you worked with the businesses and with financial intermediaries throughout the course of the proposal? 

Lourdes:

I think that we consulted extensively with all the stakeholders including member states, but as well financial intermediaries, and we have huge feedback as well from investors themselves via the public consultation. We had more than 1600 replies to the public consultation, which for direct taxation is quite a number. 

Marc:

It's a record!

Lourdes:

We are even receiving a lot of feedback now, after the adoption of the proposal. We have seen, more than 100 replies in one week. And on how we have consulted the financial intermediaries, I think that we have a very good interaction with them. 

During these two last decades, withholding tax procedures have been a big problem for them. They have to deal with this tax barrier for the free movement of capital and they really wanted to find an end to this. So they helped us as well to understand how the financial chain and the financial markets are working. DG FSIMA has been involved in the file, so we counted as well on their support to draft the initiative. I think that we managed to strike a balance amongst all the stakeholders and their interests. And that's the feedback that we have received from the first reaction of the financial sector as well. 

That's brilliant, but have there been also any challenging moments in drafting the proposal?

Marc:

It's always of course, difficult to find the right balance. I mean, we know that quite a few Member States have been faced with immense fraud, so you also want to protect the interests of the Member States, but at the same time you also need to make the system work from the perspective of the investor and their service providers, the financial intermediaries. And that is not easy. So in the discussions that we had both with the Member States, but also with financial intermediaries, we tried to listen as well as we can, and, yes, we hope that we found the right equilibrium or balance. We never know, of course, if some people might be disappointed or want more, but we also see that it was a very good first step. We've got a lot of feedback as well saying that maybe we should also adjust many more items, and we're really thinking about it. And if we can manage this first step, then we also think that maybe there could be still room for a second step. And we’ll see whether we can address also other issues that have been shared with us. But we see this very much as a first step. 

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Publication date
30 June 2023
Author
Directorate-General for Taxation and Customs Union