A report released yesterday by the European Commission looks at how to tackle national barriers with a view to boosting cross-border investments in the EU – and one of the main problems is withholding tax refunds.

The report, Accelerating the capital markets union: addressing national barriers to capital flows, is part of the Commission's capital markets union (CMU) initiative, which aims to build a single market for capital in the EU by 2019 (part of the Investment Plan for Europe to boost funding of projects, business and the European economy).

Mapping barriers to EU's capital flows

The Commissions has begun to map national barriers to cross-border capital flows and aims to create a joint roadmap with member states for removing these barriers (where appropriate). Some of the most frequently reported barriers range from marketing requirements to residence requirements and differences in insolvency regimes. Withholding tax relief procedures were also identified as a major deterrent to cross-border investment. One of the main problems is that investors face “complex, demanding, resource-intensive and costly procedures” when seeking to claim withholding tax refunds, in order to avoid double taxation of cross-border investment. It involves a heavy administrative burden, requiring the completion of up to 56 national forms, some of which cannot be done online.

The cost of withholding tax refund procedures? €8.4bn!

The Commission's report stated: “Tackling burdensome WHT refund procedures is all the more urgent as they affect all kinds of financial instruments (bonds, shares and derivatives) and stakeholders. Excessive compliance costs prevent retail investors from making claims and give rise to substantial administrative expenditure for institutional investors. In January 2016, the overall cost of withholding tax refund procedures was estimated at €8.4 billion per year in foregone tax relief (due to complex compliance procedures and costly expert advice), the costs of reclaim procedures and opportunity costs (delayed refunds mean that the money cannot be used for other purposes).”

Tackling withholding tax in Europe

The report sets out a plan of action to address withholding tax-related barriers throughout 2017, as follows:

• Q2 2017: Confirm the relevance of the nine WHT best practices identified and agree on a list that could be reflected in a scoreboard;
• Q3 2017: Discuss the way forward in a tax working group, with a view to each MS committing to a list of best practices to improve the status quo by 2019; and
• Q4 2017: Work with national tax experts on a code of conduct on WHT relief principles.

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CTMfile take: This report looks at how the European Commission will tackle the issue of claiming withholding tax refunds, which can take years and is a huge drain on resources for European businesses, investors and financial institutions.