Tax reclaim is going digital – here’s what it means for you

VIDEO | In May this year, the European Council reached an agreement on the Faster and Safer Tax Relief of Excess Withholding Taxes (FASTER) directive. Roman von der Hoeh of fintech firm RAQUEST Switzerland anticipates that this might catalyse a wave of digital transformation in withholding tax procedures. In his session titled “Digital shift in withholding tax: FASTER, MiKaDiv, Trace & Co. challenging the financial industry” at the PostTrade 360° Nordic 2024 conference, he outlined what these changes might mean for market participants.

Under the status quo, there is no standardised method for tax reclaims in the EU. Finland was one of the first to attempt to digitalise the process with the Treaty Relief and Compliance Enhancement (TRACE) procedure. Denmark requires filling out a web form; Austria, too, but with additional paper-based filings. In Switzerland, limited digitalisation has been put in place with a machine-to-machine interface that only works for German end clients.

“I strongly believe that you need at least one thing to manage those different web forms… You need at least a digital gateway, one established piece of software that transforms all the data pain points into the format that is needed in Denmark, Austria – wherever you are going,” said von der Hoeh. “Where you can go digital, you need something to transform the data. Otherwise, you’d end up building five, 10, 15 different interfaces for the authorities.”

Do you want to watch the conference videos? Make sure you are logged in and signed up for the free session video access pass for PostTrade 360° Nordic 2024. Go to My content, click on Our offers and sign up!

Standards are needed

He is optimistic that with FASTER, standardisation would come, but the directive is not without its flaws. A major limitation to its effectiveness could be the option for smaller markets to opt out.

“There’s a rule saying that if your market is below the market cap of 1.5 per cent, and in addition, has an existing relief at source option, you can opt out,” von der Hoeh explained. This means that more than 50 per cent of the 27 EU countries could potentially opt out, negating the directive’s standardising effects.

Additionally, no parameters have been given for technical requirements, so “potentially, we will end up with 15 or 20 different approaches” to the directive, instead of a standardised one.

Uniquely German

Von der Hoeh then zoomed in on Germany and its new MiKaDiv reporting procedure, which, according to a quick poll he did, appeared to have flown under the radar for most attendees at the session. “Fortunately, they shifted the implementation date from first of January next year, to one year further.”

MiKaDiv will replace the current process for the tax voucher that is issued by Clearstream and other custodians in Germany with a digital solution. It introduces a “whole new reporting component” that will require a large transfer of data to the custodian. “You’ll need, in 2026, to gather the data before filing,” von der Hoeh said. This would include data for settlement history and securities lending. The procedure would generate a single order number for each case that can be used for tax reclaim.

He urged the audience to begin preparations for adopting MiKaDiv. The German market is big, so chances are, most would have customers who own German assets. “You are all in – even if you don’t provide a tax reclaim service – if some of your clients ask for this order number, you’d need to do the reporting.”

Speaker:
Roman von der Hoeh, Managing Director, RAQUEST Switzerland

• The consolidated PostTrade 360° Nordic conference, in Stockholm on 4–5 September 2024, came to host 1,200+ delegates and featured 70 sessions.
• Our coverage relating to the event is indexed here.
• By the way … are we connected on LinkedIn already? Follow us here.