Overview
Over the past decade, international financial institutions have faced a rapidly evolving landscape of tax regulations. Authorities have tightened cross-border compliance requirements, especially for institutions serving clients outside their domestic markets. While these measures aim to protect investors and ensure tax fairness, they have also introduced significant barriers to accessing financial services across borders, particularly for institutions outside major economic unions or lacking international cooperation agreements.
The rise of global transparency frameworks
The introduction of exchange of information frameworks, such as CRS, FATCA, DAC6, DAC7 and DAC8, has granted tax authorities unprecedented visibility into offshore financial activities. This transparency applies even when institutions lack a physical presence or permanent establishment in the jurisdiction.
Increased complexity and tax burden
As such, many tax administrations have introduced measures that increase complexity and tax burden for clients holding assets abroad, especially for low tax jurisdictions. Domestic financial intermediaries often act as paying agents, directly collecting taxes on behalf of the administration. In contrast, foreign institutions typically do not fulfill this role, leaving taxpayers responsible for reporting and prepaying taxes themselves, which frequently leads to disputes. Taxpayers with significant offshore holdings are often presumed to be engaged in tax evasion or fraud, triggering heightened scrutiny and enforcement actions.
Risks for foreign institutions
For foreign financial institutions, the inability to provide jurisdiction-specific tax reporting can result in the loss of client relationships, a clear commercial risk. This risk is exacerbated when institutions fail to consider local tax regimes of their clients in their investment strategies, offering products that are tax-inefficient or even detrimental. Poor after-tax performance erodes client trust and undermines the perceived value of discretionary or advisory mandates. In severe cases, tax-related losses may expose institutions to civil liability.
Moreover, some tax authorities have reinterpreted existing laws to assert taxing rights over foreign-sourced profit generated by foreign institutions, effectively extending the reach of domestic legislation beyond national borders. Although such practices may be overturned by courts citing applicable double tax treaties or confirming the foreign source of income, the legal process is often lengthy and costly. To mitigate risk, some institutions opt to self-report and settle tax liabilities preemptively, thereby avoiding potential criminal proceedings or the qualification of the existence of a permanent establishment.
Reputational risk is also key aspect of risk management, particularly in light of the 'name and shame' communication strategies employed by certain tax authorities or local supervising regulatory authorities.
Recent development of international regulatory frameworks
Recent development of regulatory frameworks, particularly under the European Union Capital Requirements Directive VI (EU CRD VI), have brought renewed attention to tax issues such as withholding tax, stamp duties, and the potential creation of a permanent establishment in the context of cross-border lending activities.
Additionally, the EU’s FASTER directive seeks to streamline and harmonize withholding tax procedures across member states. It enhances efficiency and security for investors, financial intermediaries, and tax administrations.
At the worldwide level, the implementation of OECD BEPS 2.0 requires multinational institutions to adapt to complex reporting requirements, ensure alignment with Pillar One and Pillar Two rules, and manage cross-border coordination among jurisdictions.
Strategic vigilance and operational alignment
Therefore, in this rapidly evolving and complex environment, financial institutions must remain vigilant and responsive to legal developments that affect both their operations and their clients.
This begins with closely monitoring tax law changes in jurisdictions relevant to their clients, including the introduction of new taxes and significant shifts in jurisprudence. These changes can have a direct impact on wealth structuring, investment strategies, and cross-border mobility for private clients.
At the same time, institutions must track regulatory and tax developments in countries where they have a presence, ensuring that their activities remain compliant and strategically aligned with local requirements. This may involve reorganizing business units, operational booking centers, updating governance frameworks, or revising service offerings to reflect new legal realities.
Leveraging technology for compliance and value
The integration of Artificial Intelligence and digital platforms offers a transformative opportunity to streamline access to legal and tax intelligence, reducing both time and cost. By automating the retrieval and analysis of regulatory and tax data, institutions can enhance operational efficiency while maintaining a high standard of compliance and client service. Financial institutions can not only meet compliance requirements but also enhance client trust and long-term value, specifically with the new generation of investors.
Conclusion
In this rapidly evolving environment, financial institutions must remain vigilant, adaptive, and technologically equipped to navigate cross-border tax compliance. By aligning strategies with legal developments and leveraging digital tools, they can not only meet regulatory demands but also deliver enhanced value to global investors.
How aosphere can help
BRP, part of the aosphere group, is a trusted partner to private banks and wealth managers navigating cross-border financial complexity.
Its tax-specific division provides solutions that include, amongst others, subscription-based Country Manuals on Tax produced in collaboration with local tax counsel.
Get in touch to see how they can empower your organisation.
