Chapter 5: Relief at Source (Book Chapter on Tax Treaty Processing)

Summary

This book chapter, Chapter 5: Relief at Source, discusses the first of two broad types of processing tax authorities use to deliver tax treaty benefits to investors. The author notes that a treaty only creates an entitlement and that each tax authority decides how it is delivered, and says harmonisation efforts by Alberto Giovannini, G30, OECD and FISCO still face a long task. The chapter argues that relief at source is often described as easier than long form claiming but carries much tighter processing deadlines, citing the procedure Euroclear and Clearstream require for Spanish Eurobond coupons. It then surveys relief-at-source systems from the simple to the advanced, including commercially developed systems such as DTC's EDS system and systems built by governments.

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                                CHAPTER 5




                  Relief at Source

In this chapter, we will look at the first of the two broad types of processing
used by tax authorities. Remember that the existence of a treaty only generates
an entitlement. The way in which that entitlement is delivered to the market,
and to the investor, is in the purview of each tax authority. Despite many years
of words like “harmonisation”, we have yet to see any really effective attempt
deliver the goods. As this book is written, there is a more concerted effort
being made through the efforts of Alberto Giovannini, G30, OECD and
FISCO. However, even these groupings have a hard and long task ahead.
   The most common comment I hear in the market is that relief at source
or RAS is easier than long form claiming. While it’s true, to an extent that
the documentary requirements are often more simplistic, these are far out-
weighed by the processing requirements which have much tighter time
deadlines. Appendix 1 shows the relief-at-source procedure required by the
ICSDs (Euroclear and Clearstream) in order to obtain relief at source on
Spanish Eurobond coupon distributions. I doubt, having read it, that anyone
would think that this process is easier than the long form claim process.
   So, in this chapter, I describe several types of relief-at-source jurisdiction
ranging from the simple to the very advanced. From systems that have been
developed commercially (e.g., DTC’s EDS system) to those which have been
developed at governmental level for example, US 1441 NRA regulations.
Also, to show how these latter regulations are beginning to be adopted and
adapted by other jurisdictions, I have described both the Japanese and Irish
systems for comparison.


PRIMARY DIFFERENCE TO RECL AIM REGIMES

In basic terms RAS is simple. If, when an income event occurs, enough is
already known about the beneficial owner to decide that he is eligible for

 58
R. McGill, Investment Withholding Tax
© Ross McGill 2009
                                                        RELIEF AT SOURCE      59



treaty rate benefits, and the market concerned allows relief at source, then,
subject to the appropriate procedures, the withholding agent can withhold
the correct amount of tax due in the treaty thus removing the need for long
form reclaims.
   This may sound simple and indeed in theory it is. In practice however,
different jurisdictions take a different view on what they require to evidence
a relief-at-source claim. Fundamentally the problem is that investors change,
many things change and someone who may be eligible on one day, may not
be the next. So tax authorities take different approaches to the issue. In the
United States part of the system permits the use of a W-8BEN form which
is a certificate of tax status. This goes out of validity every 3 years. So over-
all, while investor’s may view RAS regimes as more efficient because they
do not involve long and complex reclaim processes, they are not devoid of
complexity, particularly if one is dealing with large numbers of investors
spread across the main markets. Management of documentation becomes a
major issue.
   Simple RAS systems generally require simple documentation. These can
vary from presumption to documentary. In the presumption scenario the
custodian can presume the eligibility for treaty rate based solely on very
basic information such as the address of the investor. As the name suggests,
a documentary regime will require specific documentation to establish
treaty benefits. These may be required in advance, on a regular basis (e.g.,
Spain) or at the time of each payment. However, they are all simple in their
application. Meet the simple rule and obtain the relief.
   The problem generally with withholding tax, as with many other areas of
financial services, is that the potential revenue streams and benefits are so
great, that they attract highly competitive and commercial behaviour. This
behaviour is most often aimed at reducing the transactional administration cost
of processing. The bodies capable, through size of reach, of putting such sys-
tems in place, whilst great, are not all encompassing. The result is that some tax
authorities, notably the United States, have devised RAS systems to apply in a
certain set of circumstances. Some commercial groups, notably DTC, have
also worked to a limited extent with tax authorities to make systems more effi-
cient through the use of advanced technology and process analysis and simpli-
fication tools. However, none has yet managed to harmonise all the jurisdictions
together with a single methodology which would be the utopian ideal for redu-
cing costs and providing best value to investors.


D E P O S I T O R Y T R U S T C O M PA N Y ( D T C )

I’ve mentioned that one of the dimensions of complexity was whether a jur-
isdiction was reclaim or relief-at-source-oriented or a combination of both


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