Improved tax procedures for cross border trading of securities could raise European GDP by more than €37 bn over a ten-year period© Darren Shaw
Cross border trading: improved tax procedures hold huge potential
Improving tax procedures for cross-border trading of securities could raise European GDP by more than 37 billion Euro over a ten-year period. This is the key finding of a study jointly carried out by the JRC's Institute for the Protection and Security of the Citizen (IPSC) and the Commission's Directorate General Internal Market and Services which analyses the costs and benefits of the proposals made by the EU Clearing and Settlement Fiscal Compliance Experts Group (FISCO) for improving and simplifying withholding tax relief procedures.
Based on the FISCO proposals and backed up by the economic impact study, the European Commission adopted on 19 October 2009 a Recommendation that outlines how EU Member States could make it easier for investors resident in EU Member States to claim withholding tax relief on dividends, interest and other securities income received from other Member States. The Recommendation also suggests measures to eliminate the tax barriers that financial institutions face in their securities investment activities while at the same time protecting tax revenues against errors or fraud.
The tax laws of Member States usually provide for withholding taxes on dividend and interest income paid to non-resident investors. These withholding taxes are often reduced under Member States' bilateral double taxation conventions, when the two treaty partner countries involved agree on sharing taxing rights. However, Member States' procedures to verify claims for withholding tax reliefs are often so complicated and time consuming that investors may forego the reliefs to which they are entitled or even be discouraged from investing across borders. Furthermore, these procedures often do not take into account the present-day multi-tiered financial environment where there may be a chain of financial intermediaries, based in several countries, between the issuer of the securities and the investor.
The present tax relief procedures are costly and inefficient. The study "The Economic Impact of the Commission Recommendation on Withholding Tax Relief Procedures and the FISCO Proposals" shows that the estimated potential impact of the FISCO proposals is substantial and economically significant. The study estimates the costs related to the present reclaim procedures and determines the resulting reduction of the cost of capital if the proposals are adopted. By using a simple macroeconomic model, the reduced cost of capital is translated into a higher capital stock. Finally, this higher stock of capital leads to an estimated increase in European GDP of more than 37 billion Euro over a ten-year period. The estimated figure would further increase if additional components (e.g. dynamic effects) were included.