Cross-border portfolio investments exceed $35 trillion globally, yet the intended tax benefits are so difficult to claim, they often do not reach their intended targets. The Organization for Economic Cooperation and Development has stepped in to try to help. OECD has developed and approved a standardized system of relief meant to streamline processes, reduce costs, and assure investors their rights while also improving tax compliance.

OECD says the vast majority of publicly traded securities are held through a complex network of domestic and foreign intermediaries, but few countries have adapted their withholding tax collection and relief procedures to recognize a multitiered holding environment. That structuring is what makes it difficult for cross-border investors to claim withholding relief effectively, even when they are rightfully entitled to it. OECD says it began in 2006 to work on improving the process by which portfolio investors could claim treaty benefits.

The result is the Treaty Relief and Compliance Enhancement system, an electronic format, an electronic system for information to be reported by financial institutions to tax authorities and for information to be exchanged between tax authorities in different jurisdictions. The system is based on XML, or eXtensible Markup Language, technology. The “Implementation Package” adopted by the OECD committee that developed it would allow authorized intermediaries to claim exemptions or reduced rates of withholding taxes on a pooled basis on behalf of their portfolio investor customers.

The system is intended to enable intermediaries who have the most direct contact with an investors to maintain the relevant information without having it passed up the chain of intermediaries, OECD says. That means they can facilitate withholding relief claims for their customers directly and would not need to pass proprietary customer information to potential competitors. Investors would be able to indicate their entitlement to exemptions or reduced withholdings. The improvement of automatic exchange of information would reduce administrative costs, improve efficiencies, and increase the likelihood that investors will receive the tax benefits intended.

The OECD implementation package contains a complete set of tools and documents for intermediaries to begin using the system, although OECD acknowledges there are still some technology issues to resolve and in some cases participating countries may need to change certain domestic laws to enable intermediaries to participate. OECD says countries will want to assure themselves they can achieve a level of information exchange that satisfies their needs. In addition, countries will need to consider how they will review their taxpayers' compliance with the system.

The United States is one of 34 countries in North America, parts of Europe and Asia, plus Australia and New Zealand, that participate in OECD.