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:

• The Report on the “Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles”, which discusses technical issues and makes recommendations with respect to the treaty eligibility of collective investment vehicles, was referred to Working Party 1 for further work.   The CFA released its final report on the “Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles” on 31 May 2010, and the recommendations made in that report were incorporated into the 2010 update to the Model Tax Convention released on 22 July 2010.
  
  
• The Report on “Possible Improvements to Procedures for Tax Relief for Cross-Border Investors” makes a number of recommendations on “best practices” regarding procedures for making and granting claims for treaty benefits for intermediated structures. The Report recommends that countries develop systems for claiming treaty benefits that allow authorised intermediaries to make claims on behalf of investors on a "pooled" basis. One of the major benefits of such a system (variations on which have been adopted by a few countries over the past decade), is that information on the beneficial owner of the income is maintained by the intermediary at the bottom of the chain, rather than being passed up the chain of intermediaries. Although a country may be willing to provide benefits on the basis of pooled information, it may wish to be able to confirm that benefits were properly granted. For that reason, and in order to encourage compliance in the residence state, the ICG also recommended that financial institutions that wish to make use of the "pooled" treaty claim system must report investor-specific information on the beneficial owners of the income directly to source countries (i.e. not through the chain of intermediaries.) BY agreeing to report this information as a condition of benefitting from the streamlined claims of procedure, financial intermediaries can contribute greatly to the ability of governments to ensure through exchange of information, that investors' tax obligations are met in both source and residence countries on the ever-increasing flows of cross border investment income. 

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:

• developed an electronic format for the information to be reported by financial institutions to tax administrations and for the exchange of information between tax administrations. This format, using eXtensible Markup Language (“XML”), is called the TRACE XML Schema. XML is the modern industry standard mark-up format, as used in the OECD Standard Transmission Format (STF), and the EU format developed from STF for the Savings Directive, FISC 153.
  
  
• designed and conducted a Proof-of-concept test to confirm that the TRACE XML Schema fulfilled the objectives of the TRACE project from the perspective of the financial intermediaries and the tax authorities of the source and residence countries involved recommended the use of secure file transfer protocol (“sFTP”) as the transmission method for reporting by financial institutions to tax administrations and for the exchange of information between tax administrations, or alternatively, the existing EU CCN system for exchange between tax administrations, where available.

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