Government and fiscal authorities continue to propose, develop, and implement changes that challenge investors’ returns and excess tax recovery avenues. Among these changes, here are the larger topics our clients are following.

1. New U.S. Tax Withholding and Compliance Challenges

The expansion of withholding tax to proceeds from the sale of partnership interests is one of the farthest-reaching new taxes impacting non-U.S. resident portfolio investors. Industry groups, including the Association of Global Custodians (AGC) and the Securities Industry and Financial Markets Association (SIFMA) were involved in shaping the final Treasury Regulations. Withholding agents were obligated to implement a 10% tax on publicly traded units from January 1, 2023. However, challenges relating to identification of in-scope securities, tax information reporting, and tax return filings lie ahead for both global financial institutions and investors subject to these new withholding taxes, reporting, and return filing requirements.

2. EU Commission’s Proposal to Harmonize Withholding Tax Procedures

In mid-June of this year, the European Commission (EC) released a proposal that would overhaul how countries administer and support relief from excess taxation of cross-border investment income. The “Faster and Safer Relief of Excess Withholding Taxes (FASTER)” initiative proposes a significant revision to EU tax withholding procedures. The stated goal is to make these both more efficient and secure for investors, financial intermediaries, and tax authorities through digitizing proof of residency, and introducing additional documentary evidence and reporting requirements meant to help governments come to a quicker decision on eligibility for relief from excess taxation. The draft Directive allows Member States to affect this relief through either a quick refund system, a relief at source system, or a hybrid combination of both approaches. Cross-border investors and financial institutions serving as brokers, custodians, and nominees should monitor progress on this closely, as the additional authorization, registration, and reporting requirements are certain to impact operating models and require supporting investments as these changes evolve. Industry groups have been actively feeding back their views and suggestions related to the proposal.

3. Germany’s Approach to Overhauling Tax Reclaim Administration

To add to the list of changes impacting cross-border investors, Germany is in the process of implementing administrative, procedural, and technological changes to their tax reclaim processing model. These changes are expected to advance ahead of broader EU-driven proposals, and changes may take some time to implement fully. The German Tax Relief Modernization Act contained several provisions aimed at updating withholding tax relief in Germany. Central among those provisions is moving away from paper-based treaty reclaim applications and introducing the requirement to file all tax reclaims electronically beginning January 1, 2023. The German Ministry of Finance allowed a six-month grace period where paper reclaims could continue to be filed. Despite the postponement, lobbying efforts proposed to extend the grace period as guidance has lagged, and as a result many questions related to the updated treaty-based reclaim system remain unanswered. The shift to electronic-only reclaim filing has no impact on the statute of limitations, however, investors eligible for treaty-based reclaim relief may see delays in their ability to recover excess German withholding tax while changes related to the new system are implemented.

4. Evolving Crypto and Digital Assets Tax Requirements

Fiscal authorities continue to refine their focus on developing tax rules relating to crypto and digital assets. In Europe, the OECD is expected to provide further guidance to their report on global tax rules for crypto assets, and crypto assets are expected to be included in automatic exchange of tax information between jurisdictions under the Common Reporting Standard in the future. In the U.S., the Treasury initiative follows prior cost basis reporting rules, which requires brokers to report on the sale and other transfers of digital assets in much the same way they are currently required to report on the sale of stocks and securities. There are also threshold rules for larger receipts of digital assets, which trigger additional reporting. Industry feedback has continued to flow on these topics, as there are significant differences between market mechanisms, investor transactions, and account models when compared to existing traditional and even alternative asset class models. Financial institutions, funds, and brokers that presently facilitate or are contemplating expanding into crypto and digital asset activities will want to closely monitor developments, and assess impacts to business model, technology, and compliance readiness as tax information reporting and related rules develop.