The Future of Taxation for Financial Services, Tax Authorities and End Investors

During the course of October, WTax attended two conferences hosted by Hansuke Consulting: Operational Taxes for Investment Firms, and the Financial Services Tax Conference: Taxation in Times of Crisis. Two significant themes emerged from the insightful discussions held, namely, the evolution of the taxation landscape, and trust in the end-to-end taxation system.

With gratitude to Hansuke and the expert panellists who spoke, WTax is echoing our taxation-professional peers’ calls to lean into technology developments to effectively manage an increasingly globalised tax landscape. The industry is required to embed compliance within tax systems, become more agile, mitigate risk, and restore trust.

If we were to summarise the key learnings in two words, “Tax Integrity” would be an accurate fit. We have shared snapshots of takeaways from the discussions below:

Tax Authority Audits

Requests for information are on the increase whereby custodians, asset managers, fund managers and asset servicing providers are now viewing tax authority requests for information within the light of project management, particularly considering timing constraints and the cross-functional nature of data collection that is required. Agile technology and a single point of contact within institutions will help build a strong framework around the governance and accuracy required to respond to such tax authority requests timely and confidently.

Tax departments are evolving into risk functions within organisations

The decision-making process in relation to tax service delivery is heavily incumbent upon commercial and business risk, given the expeditious changes and challenges within the withholding tax space. Assessing options for third-party outsourcing and immersing change is becoming increasingly dependent on risk appetite and business rationale. There is a need to pre-empt the withholding tax world’s evolution, with the use of agile reporting techniques and data analytics to build a robust tax data story. The use of cloud functionality is heavily emphasised as an efficient technique for tax data gathering purposes.

Increasing complexity in regulatory compliance

The OECD’s base erosion profit shifting (BEPS) and Anti-Tax Avoidance Directive (ATAD 3) are likely to bring complexities in Certificates of Residency issuance within the realm of understanding shell management companies and their recognition in local jurisdictions. This, together with the complex concept of Beneficial Ownership, may over time begin to impact the end-to-end cost of investing in funds. The importance of accurate and timely fund accounting reporting mechanisms and efficient withholding tax relief and reclaim processing is thus at the forefront to ensure that any eligible tax yield is obtained.

A fast-changing tax environment

Operational and technological changes need to accelerate to keep pace with the dynamic global tax landscape of today, which is often analogous to the operational tax environments within institutions due to budget constraints and lack of flexible and modern technology. Additionally, the EU Commission’s Consultation on Cross-Border Investment and Simplified Taxation (due to be issued in March 2023) is emphasising the need to introduce digitalised and harmonised tax relief processes across its member states. Technology solutions will be imperative throughout the withholding tax intermediary chain along with considerations of outsourcing areas of expertise and/or tax reporting assistance to third-party vendors to bring about swifter and more cost-effective change.

The Tax Relief and Compliance Enhancement (TRACE) initiative

The Finnish Tax Authorities (FTA) shared their views of TRACE as a successful proof of concept. Within the first year of its application, 94% of Finnish dividends were paid out via Authorized Intermediaries (AI’s), with 50% of the dividend payments having Double Taxation Treaty rates applied to end investors. One of the further developments to the TRACE model discussed was the uptake of the application of tax relief by Investment Fund investors, likely due to the domestic exemption rate which is only applied directly upon submission of a standard reclaim to the FTA. The FTA is reviewing such scenarios to understand if the issuance of Tax Cards for 0% entitled beneficial owners could be a consideration in the future, which would allow Authorised Intermediaries to apply the exemption directly under TRACE.

WTax continues to closely monitor the FTA’s reviews to ensure that we incorporate any updates into our “Rules Engine” (our Artificial Intelligence-driven database of tax rates and investor matrices that are mapped alongside foreign tax authority filing procedures) to continue assisting investors with any potential non-pursued tax relief.

Environmental, Social and Governance (ESG) Reporting and the Crypto Asset Reporting Framework (CARF)

There is a need to embed pre-emptive tax measures in anticipation of standardisation in ESG regulation, and we are reminded that viewing tax reporting (and indeed, tax integrity by association) through an ESG lens can help businesses restore trust. The most recent CARF (regulation to be issued in November 2022) highlights the need to modernise tax transparency regulations. The G20 is conscious that the industry requires around 18 months to implement reporting solutions, whilst the IRS is due to release U.S. CARF regulations following laws already passed in U.S. congress. DAC 8 is expected to further build upon CARF. These developments further the resolutions the industry needs to respond to fast-changing and complex regulations, leaning into sophisticated, agile technology to progress.

Cum-ex and cum-cum learnings

The hard lessons learnt from years gone by are now reflected in ever-increasing compliance requirements; restoration of trust in the system is thus critical. WTax is at the forefront of assisting organisations with the associated challenges faced within this domain, as we continue to work on providing solutions for custodians and intermediaries to elevate rigour in compliance and risk management.

Managing Taxes Globally

With the increase of digitalisation, new tax rules are needed as current regulations are outdated within the globalised environment of cross-border investments. International collaboration (such as global reporting regulations, quality of tax reporting, etc.) contributes to the detection of tax fraud and is therefore critical. The G7’s recent papers talk about “compliance by design”. WTax echoes this sentiment with the digitisation of tax being at the core of our business and servicing provided to clients, in relation to withholding tax reclaim purposes, sophistication in tax reporting and relief at source support. Additionally, we are closely following the evolution of the EU’s Consultation to ensure our tax service offerings evolve with the future state model of the European withholding tax system.

Restoring Trust in the System

A pervasive theme throughout, transparency is necessary for tax integrity, such as proactive reporting techniques, data health checks and sophisticated risk reporting solutions.

WTax continues to build solutions to facilitate and support tax transparency, leveraging off our technology-led processes and tax technical solutions we have built. In short, compliance must be embedded within tax systems to continuously demonstrate adherence to tax regulations and legislation throughout the chains of intermediaries that may arise throughout the lifecycle of tax relief on investments.

To summarise, Tax Integrity goes hand in hand with Tax strategy and Tax morals; it is woven into the framework and systems within an institution, and it is thus imperative to ensure the required technological solutions and outsourced third-party support are implemented to comply with the global and often complex tax changes that remain on the international tax horizon.

Whether you are a financial intermediary or an investor, please get in contact to discuss the tax impact of your or your clients’ investments and solution requirements at: info@wtax.co

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