While the vast majority of publicly traded securities is now held through a complex network of domestic and foreign intermediaries, few countries have adapted their withholding tax collection and relief procedures to recognize this multi-tiered holding environment. It is therefore often difficult of impossible to make an effective claim for withholding tax relief.
In 2006, the Committee on Fiscal Affairs (“CFA”) and the Business and Industry Advisory Committee (“BIAC”) agreed to work on improving the process by which portfolio investors may claim treaty benefits. The objectives of the work on procedures were two-fold: (i) to develop treaty relief systems that are as efficient as possible, in order to minimise administrative costs and allocate the costs to the appropriate parties; and (ii) to identify solutions that enhance the ability of both source and residence countries to ensure proper compliance with tax obligations. To this end, an Informal Consultative Group (“ICG”) made up of government representatives and of experts from the business community was created. The initial two-year mandate of the ICG had two aspects: (1) legal and policy issues, primarily relating to the extent to which either collective investment vehicles or their investors are entitled to treaty benefits; and (2) procedural aspects regarding claims for reductions in source country withholding tax provided for by treaty when assets are held indirectly, whether through CIVs or through nominees and custodians.
In January 2009 the CFA released for public comment two reports by the ICG:
In January 2009, the CFA referred further work on the procedural issues to a pilot Group on Improving Procedures for Tax Relief for Cross-Border Investors (“Pilot-Group”), also made up of government and business representatives. The Pilot Group’s mandate was to develop standardised documentation for the implementation of the best practices as recommended in the ICG’s Report. In fulfillment of that mandate, the Pilot Group prepared a draft “Implementation Package.” The Package was a self-contained set of all of the agreements and forms that would pass between a source country and the financial intermediaries and investors participating in the system.
In January 2010, the CFA decided to release the Pilot Group’s draft for public consultation and approved the creation of: a) the TRACE Group made up of government representatives; and b) TRACE IT Experts Group, a joint group of government and business experts, to develop information technology solutions to support the project.
In December 2012, the TRACE Group approved a revised version of the Implementation Package which takes into account the comments received on the Pilot Group’s draft.
In the fulfillment of its mandate the TRACE IT Expert Group has:
In January 2013 the CFA endorsed the Implementation Package and approved further work in two areas: a) exploiting synergies between TRACE, FATCA, the Common Model for Residence Country Reporting and any EU follow-up work on the FISCO Feasibility Study; and b) developing a plan for a multi-country adoption of the Authorised Intermediary system and assisting countries progress towards adoption.
Going forward, the TRACE Group and TRACE IT Group continue their work as special working sessions of Working Party 10 and its Expert Sub Group.
For further information please contact Philip.Kerfs@OECD.org