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EU plans faster investment tax refunds from 2017: document

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A rise in the number of banks giving up primary dealer roles in European government bond markets threatens to further reduce liquidity and eventually make it more expensive for some countries to borrow money.

[LONDON] European Union countries will have to introduce rules from 2017 to speed up tax refunds on cross-border investments, part of a drive to improve the working of financial markets and lift economic growth, according to an EU document seen by Reuters.

The executive European Commission wants to simplify"withholding tax" on stocks and bonds bought in one member state by an investor from another, dipping into a sensitive policy area that may raise hackles in finance ministries.

The EU executive had already signalled it wanted to reform withholding tax as part of a Capital Markets Union project to boost cross-border investment, and the Commission document seen by Reuters details how this would be done.

The failure of past efforts to cut red tape has meant cross-border investments are often taxed twice, in the investor's own country and in the country where the investment is made.

Treaties between member states have failed to stop double taxation in practice, with investors waiting years in some cases for refunds, often giving up or not bothering to claim due to bureaucracy, the Commission said in the document.

Costs to investors from burdensome refund systems were an estimated 8.4 billion euros (US$9.2 billion) in 2009, with 5.47 billion euros a year in foregone tax relief alone, it said. "Burdensome withholding tax procedures have for a long time been identified as a barrier to cross-border investment," the executive said in the document.

"All this translates into reduced returns for investors and contributes to the fragmentation of the asset management industry in Europe along borders." A streamlined tax system would increase the bloc's economic growth by 3.4 billion euros or 0.028 per cent a year, the Commission paper said. "The Commission is planning to develop a code of conduct to be adopted by the Commission in 2017 whereby member states would commit at least to some basic principles," the paper adds.

The principles would include a short deadline for refunds of all claims for withholding tax, simplified proofs of investor residence, and simplified documentation for making refund claims.

Financial institutions would also be allowed to make refund claims on behalf of customers - currently the customers themselves must lodge the claim. "This is one area where the European Commission is doing the right thing. Tax authorities put up as many barriers and obstacles as possible to avoid paying tax that is legitimately due," said Chas Roy-Chowdhury, head of tax at ACCA, a global accounting body. "This is going to come up against a lot of opposition as many southern EU states consider it to be money they can hang on to even though its owed back," Roy-Chowdhury said.

The Commission document said the European Central Bank was concerned the current withholding tax system was crimping the efficiency of its new Target 2 Securities or T2S platform.

T2S is being phased-in to provide unified plumbing for settling securities transactions within the euro zone, a major step forward in integrating the EU's fragmented capital market to compete better with the United States and Asia.