Clarity needed on FASTER initiative

The European Commission’s (EC’s) proposed FASTER initiative aims to harmonise and simplify withholding tax (WHT) processes within the EU while cracking down on double taxation and tax abuse. Broadly, it has been met with approval across the financial world.

Aside from the efficiencies the directive promises, it looks set to create a formidable opportunity for modernising and digitising WHT processes, with technology sitting front and centre. However, there is a lack of clarity regarding operationalising this initiative.

Details are needed on exact requirements, and how data will be collected, validated, and transmitted. The initiative also needs to be considered in the context of the practical realities of each of the 27 member states’ individual readiness and existing processes.

Step towards consistency

The intention to create a single digital tax residency certificate (e-TRC) that’s valid for all EU WHT relief processes is a good one and an important step toward consistency and efficiency across the EU.

From the start, though, several considerations must be clarified. How will e-TRC requests be submitted? Is there an option to make bulk requests for several beneficial owners? How will the data then be transmitted to each of the tax authorities?

To solve this, a consistent mechanism for submitting e-TRCs, including in bulk, must be designed. A complex ecosystem of 27 different processes and connectors will not work. Rather, what’s needed is a unified channel for connecting and transmitting data to each of the 27 tax authorities.

Equally important is a common verification method for checking the authenticity and content of e-TRCs. The most effective way to do this is to ensure that the process is based on a common database of beneficial owners.

Evolved systems

Across the EU, withholding tax systems have evolved and reformed, impacting FASTER implementation and whether each EU state can achieve the stated time frames. For example, many EU states currently can only offer refunds through a lengthy reclaim process. Dividend compensation periods also vary, impacting how intermediaries would treat a long-term position versus a trade that settled over the relevant dividend dates.

Combined, this creates uncertainty about how member states will change existing procedures to guarantee that all relief-at-source and quick refund (QR) requests are satisfied within the 50-day timeframe.

Another area in which member states vary is in the due diligence and validation process when applying different tax rates. Some states require trade data or minimum holding period assessments as proof of eligibility for tax treaty benefits. This can impact relief procedures and must be clarified for all the 27 tax authorities.

Standards clarification

Different WHT systems and definitions of beneficial ownership can be found across the EU. As such, the minimum reporting standards set by the FASTER directive need to be clarified, ideally with common reporting rooted in data points already collected by most member states. As the required data will also be influenced by which entity is closer to the beneficial owner in the income custody chain, a financial intermediary acting as a global custodian, for example, shouldn’t be asked to produce the same data as a local custodian bank.

The FASTER directive will undoubtedly bring transformative efficiencies to WHT processes across the EU in its current iteration. However, without the necessary technologies to automate, standardise and secure core undertakings, it risks failing to realise its full potential. A unique and established mechanism for financial intermediaries to adhere to and consistent transmission and connection protocols across the EU will play a crucial role in achieving the FASTER initiative’s goals.

By addressing the concerns raised here and elsewhere, technology providers can begin developing solutions to ensure that the directive delivers now and well into the future.