On 6 September 2021 the OECD issued a document entitled: Tax administration responses to COVID-19: Administrative measures to facilitate withholding tax relief claims.
Cross-border withholding tax relief procedures are frequently reliant on paper-based processes and have been particularly affected during the pandemic.
Applications for tax relief at source and refund procedures are affected. Some countries use digitalised procedures, but others rely on paper-based procedures and these are slowed considerably by measures taken during the pandemic.
Challenges in the pandemic
Often withholding tax relief procedures require a certificate of tax residence to be issued by the residence country’s tax administration, for the tax year when the dividend or interest is paid. Some countries may need a certificate each time a payment is made or relief at source is to be given.
As tax offices have been closed and remote working introduced during the pandemic, the ability of tax administrations to issue physical certificates of tax residence or to certify reclaim forms may be limited.
Where publicly traded securities are held through multiple tiers of financial institutions, documentation needs to pass through a number of intermediaries to a withholding agent in the source country, and there will be delays.
Given the difficulties, investors may not obtain withholding tax relief, particularly relief at source, and investors may need to claim treaty relief through a refund procedure instead of relief at source. This increases refund claims which the tax administration in the source country may not have the resources to deal with.
Best practice recommendations
As tax administrations are faced with a large backlog of tax refund claims they should take steps to ensure that withholding tax relief claim processes continue to be administered effectively.
In view of the difficulties that may be faced by taxpayers in obtaining residence certificates, countries could, as a temporary measure, allow investors to claim tax relief or make reclaims on the basis of the most recent certificates of residence in their possession.
A time period could be established during which a tax residence certificate is valid for certifying the tax residence of a taxpayer for claims to withholding tax relief. Countries could also admit claims on the basis that a tax residence certificate for the relevant tax year is to be submitted in due course; or they could require evidence that the certificate has been requested, with a reasonable expectation that it will be issued.
A country could permit withholding agents to apply the treaty withholding tax rate where this has been done for a particular taxpayer in the prior year and the financial institution can certify that there has been no material change in the information to suggest any change of tax residency; and the taxpayer can self-certify their tax residency.
The source country could change its regulations to accept digital tax residence certificates and digitally signed claims for tax relief. Some countries are accepting electronic documentation pending the submission of paper documents, while others already accept digital documents.
Countries could also suspend the requirement for notarisation or legalisation of documents submitted in support of withholding tax relief claims.
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Communication
The measures implemented in relation to claims for withholding tax relief should be well publicised so withholding agents, custodians and investors know about the rules and apply them.
