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OECD Aims To Ease Access To Tax Treaty Benefits

by Ulrika Lomas,, Brussels

14 February 2013

The Organization for Economic Cooperation and Development's (OECD) Committee on Fiscal Affairs has approved the TRACE Implementation Package, which envisages the introduction of a simplified process for foreign portfolio investors to obtain the tax benefits of bilateral conventions for avoidance of double taxation.

Nations worldwide have concluded more than 3,000 double tax treaties to facilitate cross border portfolio investment, which, according to the OECD, totals some USD35 trillion. These double tax agreements entitle investors to reduced rates of withholding tax on dividend, interest or royalty income.

However, obtaining withholding tax relief is often cumbersome, as well as time- and resource-intensive and many foreign portfolio investors often do not avail themselves of the tax breaks.

The OECD has developed TRACE, a standardized "Authorised Intermediary (AI)" system, to streamlime the process of obtaining tax relief, reduce costs and enable investors to benefit from their right to reduced withholding tax rates.

The AI system, which nations have been encouraged to adopt, would mitigate the adminstrative barriers that currently affect the ability of portfolio investors to claim reduced rates of withholding tax.

The regime allow "authorized intermediaries" to claim exemptions or reduced rates of withholding tax - pursuant to tax treaties or domestic law on a pooled basis on behalf of their customers that are portfolio investors. One of the major benefits to intermediaries of such a system would be that information regarding the beneficial owner of the income may be maintained by the intermediary with the most direct account relationship with the beneficial owner, rather than being passed up the chain of intermediaries. Accordingly, intermediaries in the chain can facilitate withholding tax relief claims for their customers, without passing proprietary customer information to potential competitors (i.e. the other intermediaries).

Meanwhile, investors would be able to indicate their entitlement to exemptions or reduced rates of withholding tax by providing a standardized investor self-declaration to the intermediary with which they have a customer relationship, without procuring a certificate of residence.

Facilitated by the increased adoption of automatic information sharing between nations' authorities, the process could replace source country requirements for certificates of residence, providing a more robust process for checking eligibility to withholding tax relief, reducing administrative costs for source countries, residence countries, investors and intermediaries alike.

TAGS: compliance | tax | investment | business | tax information exchange agreement (TIEA) | double tax agreement (DTA) | tax compliance | tax incentives | interest | law | agreements | tax planning | tax rates | withholding tax | tax breaks

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