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EU-wide system for withholding tax relief

Withholding and corporate tax documents piled up on a desk
The JRC estimates the costs associated with withholding tax relief procedures to amount to € 6.62 billion per year
©smolaw11– Adobe Stock.com

Procedures for granting withholding tax refunds on cross-border investment have been a major and long-standing barrier to the free movement of capital within the EU. Addressing this problem, on 14 May 2024, the EU Council reached an agreement on safer and faster procedures to obtain double taxation relief. The so-called FASTER initiative follows from the Action Plan for fair and simple taxation supporting the recovery, which proposed to introduce a common, standardised EU-wide system for withholding tax relief at source. The initiative contributes also to the aim of the Capital markets union 2020 action plan to alleviate the tax burden of cross-border investment to foster capital markets integration.

The JRC actively contributed to the economic impact assessment of the FASTER initiative by analysing the effects of withholding taxes and relief procedures on cross-border investment and macro-economic aggregates using the general equilibrium model CORTAX.

The JRC estimates the costs associated with withholding tax relief procedures to amount to € 6.62 billion per year. Lengthy and inefficient withholding tax relief procedures can give rise to direct financial costs, implicit financial losses (i.e. opportunity costs) and foregone tax relief.

Reinforcing these estimates, the empirical analysis carried out by the JRC shows that investors are highly sensitive to these costs. Finally, the JRC quantified the macroeconomic effects of eliminating the costs associated with inefficient withholding tax relief procedures. For that purpose, the JRC has used the CORTAX model, a Computable General Equilibrium (CGE) model designed to analyse corporate tax reforms in the EU27, UK, US and Japan. The original version of CORTAX was modified appropriately in order to accommodate the relevant policy parameters in the context of this exercise.

For more information on the initiative and the JRC contribution, please refer to the dedicated website of the FASTER initiative.

 

Team

Serena Fatica

Jon Pycroft

Andrzej Stasio

Daniel Stoehlker