The FSTC 2023 started with the welcome words of Ali Kazimi from Hansuke. After a brief review of the current political situation in the world, Ali Kazimi explained the challenges and issues which the financial industry is facing today and announced the conference sessions which will focus on those topics. Again, similar to last year, the conference was built as a series of panel discussions rather than teaching-style lectures. This provided an excellent platform for a very broad spectrum of experience exchange and allowed for the analysis of topics from different angles and perspectives. The audience participated very actively in all sessions by asking many very sophisticated questions from practice and discussed possible solutions together with the panelists. This significantly increased the practical value of every single panel discussion.

The first panel discussion dealt with today’s challenges and issues related to EU WHT reclaims. A panel of leading international experts, Steffen Gnutzmann from WTS Global as the moderator, Alexandre Maitrot de la Motte from the University of Paris, Jeroen Van Der Wal from Taxology and Rebecca Wilmott from JP Morgan discussed the legal and practical aspects of reclaiming discriminatory EU withholding taxes suffered on portfolio investments. EU Member States had introduced strict documentation and substantiation requirements for the eligible claims to be accepted. It was again very clear that despite the EU initiative for standardisation and simplification of the withholding tax reclaim procedures in the EU, better known under the acronym FASTER, there are still many unanswered questions out there. The most frequently mentioned concerns were still related to harmonisation of the procedures within the EU – with a clearly demonstrated concern to end up with 27 different documents and 27 different definitions which would have to be submitted to 27 tax authorities within the EU.

In the next panel, Jessalyn Dean led through the session as a moderator and Awa Diouf from the Institute of Development Studies, Danish Mehboob from Bloomberg Tax and Paul Aplin, former President of the ICAEW discussed the taxation of digital financial services and its impact on the taxation of traditional financial services. One of the most intense discussions developed around the question of whether there should be a difference between the taxation of digital and traditional financial services. After the very intensive discussions the panelists came to the final conclusion that it is inevitable that tax policy and administrative decisions must balance competing interests including fairness, inclusion and international development.

The Half-Time Summary: EU 1 – 0 UK sounds rather like an announcement for a football match than for a tax discussion. The Brexit discussion at the FSTC 2023 conference led by Tim Sarson from KPMG and joined by Patrick Reidy from Capital Group, Tapiwa Mashingaidze from Alcentra and Dr. Kunka Petkova from the German Federal Ministry of Finance was really a very interesting one and again raised the questions of whether the Brexit was the right decision for the UK and how it has influenced the development of the UK’s economy and especially the financial industry since then. We have heard some critical words on the Brexit strategy and economic development of the UK in general, but the panelists’ opinion regarding the financial industry has remained unchanged – the opinion that since Brexit London’s position as a financial centre has been marginally eroded in only some of the business lines (i.e. as the banking hub for the euro area), but in its role as an international financial centre, London has retained its top position.

After the lunch, which provided a very pleasant opportunity for networking, we continued with no less interesting topics compared to the morning sessions. Helen Whiteman from the Chartered Institute of Taxation moderated the panel with Inga Nitsche from iCapital, Dr. Kunka Petkova from the German Federal Ministry of Finance and Michel Braun from WTS Germany as the panelists. The first panel discussion in the afternoon had a very provocative title: “ChatGPT Eats Tax Professionals for Breakfast”. This topic drew huge attention of the audience and led to some very emotional discussions about the role of tax professionals today and their perspectives in the future. The question of whether the practice of tax is art or a science was raised. Since many claimed that only creative jobs would survive the onslaught of AI, the panel discussed how to survive as a tax professional in the world of automation, boosted productivity and AI. After a very lively discussion in the panel, complemented with a very strong involvement of the audience, the panel came to the conclusion that “ChatGPT has an insatiable appetite, but it’s not quite ready to eat us yet”.

 

One of the further hot topics on the agenda was the tax integrity across the financial services industry. Ali Kazimi moderated the panel with Sara Jespersen from the Copenhagen Business School and Sandra Martinho Fernandes from EBRD. The panelists discussed tax integrity as the final frontier of the tax profession and agreed that adopting human-centred tax integrity should be seen as essential in all firms. They should adopt it and develop approaches to reduce risks of misconduct and to foster genuine engagement, robust governance and a positive corporate reputation.

 

The last two sessions of the conference dealt with the taxation of private equity industry where the jurisdictional competition plays a very big role and the impact of current regulations and initiatives on the tax departments. Both sessions caused a strong involvement of the audience, which again proofed the very high relevance of all topics discussed at this conference.

CONCLUSION

The 5th edition of the FS Tax Conference also proved to be a highly desirable and robust platform for tax professionals, academics, tax authorities, journalists and leading industry practitioners for the exchange of information and opinions on current topics in the field of taxation from different angles and perspectives. It provided some in-depth insights into the practice of taxation, its daily challenges and issues and gave some orientation for the future.

SDS as a renowned technology and software solutions provider in the area of international tax and regulatory reporting for FATCA, CRS, QI, OECD TRACE and WHT with long-standing experience serving global financial institutions was delighted to sponsor this excellent industry event for the fifth consecutive year.

Observation by:

Hrvoje Kajzer

Feel free to contact me anytime for further information, an expert chat or any discussion about the topics mentioned above.

The proposed EU FASTER initiative tackles the issue of a practical tax disadvantage for non-domestic investors within the EU.

This disadvantage, also known as Giovannini Barrier 11, has been a problem for the free flow of capital within the EU for a long time and no practical solution has been found so far. In order to eliminate the high cost and administrative burden regarding the proper taxation of cross-border payments both in the source and the target country, the EU now proposes a mix of at least two withholding processes.

For undisputed cases, a fast-track procedure (either quick refund or relief at source) has to be implemented by the EU countries that grant tax relief for cross-border income. The system shall be easily accessible to investors. In particular, an electronic tax certificate shall help with the identification of the beneficiary’s tax status, and the fast-track procedures shall be handled primarily by the financial intermediary within the payment chain. Both measures shall facilitate a faster relief than with the current procedures.

For disputed cases, namely for transactions within two days prior to the so-called ex-date of dividend payment and for transactions that are linked to open financial arrangements, no such fast-track procedure shall apply. Instead, the traditional long-form approach has to be used.

The two rules and the proposed handling of unsettled transactions raise a number of questions that have been addressed by the financial industry. From a specialist’s point of view, some of the proposed rules do not appear to make things easier. In some cases, we may even see a rollback of some simplifications that the industry has already adopted.

However, since most of the disputed rules are designed to target tax abuse, it is unclear to what extent the tax authorities in the EU are willing to listen to the concerns of the industry.

To learn more about what the EU has proposed and what the potential pitfalls for implementation are, download the second part of our whitepaper series on EU FASTER.

22 years ago, the Giovannini report on Cross-Border Clearing and Settlement Arrangements in the European Union was published, and one of the barriers that the working group had identified was the tax withholding process for cross-border financial investments within the European Union. The practical application of a correct withholding tax rate for both the source and the target country – according to their double taxation agreement – is problematic. The crux is that the issuer of a security is obliged to withhold tax on income payments on a maximum level in the source country (some exceptions apply) and that the country of the beneficiary will perform another withholding at a local tax rate. To facilitate the correction of this overwithholding, the beneficiary needs to get the two tax authorities to agree on his/her tax status and the taxation of the payment according to a double taxation agreement (DTA). The beneficiary also needs to either apply the correct tax rates at the time of the payment or to correct the withholding afterwards.

Despite several attempts, the fundamentals of the barrier have remained intact. Now, with the recent proposal by the Commission (https://taxation-customs.ec.europa.eu/taxation-1/corporate-taxation/faster-initiative_en), the EU financial markets will experience an initiative to solve the issue on a regulatory level.

The initiative builds on a combination of three different concepts for tax relief.

The most conservative approach is the long-form reclaim after the payment and the overwithholding have been performed, where it is up to the beneficiary to supply the necessary documentation about his/her tax status and tax residence and to provide the tax authorities in the source country with appropriate documents. While this task can be handed over to a tax advisory or intermediary, the cost and the time for a refund can be significant and may force investors to waive their right to a proper taxation.

Quick refund is in principle the same, but the documentation is provided up front, and the relief can be granted much faster, at least in undisputed cases. In addition, the relief procedure may be outsourced by a tax authority to a withholding agent, which makes quick refund a process that runs within the financial industry and their well-honed systems, communication channels and procedures.

Relief at source is a fundamentally different process, where the issuer in the source country or an intermediary has upfront knowledge about the tax rates that have to be applied on the income payments and only withholds at a rate in accordance with the DTA. The intermediary who makes a payment to the beneficiary in the receiving country applies the reduced local tax rate. Relief at source is without a doubt the most elegant and efficient of the three models, but it is seen as being more prone to tax fraud than the other two.

To learn more about the three models, their pros and cons, and how they work in detail, take your time to download the first part of our series of whitepapers on EU FASTER.

The opening remarks of Ali Kazimi of Hansuke, chairman of the conference, gave us an outlook on what we could expect during the conference day in a very charming and funny way.

The concept of the entire conference was to provide many panels, discussion forums, and interactive sessions which included the audience rather than lecture-style presentations. In the first session – a panel discussion about how to deal with increased tax authority scrutiny, moderated by Mark Huyan of State Street – panelists Corinna Hedtke of Standard Chartered Bank, Pilar Espejo of BNY Mellon, Jeroen Van Der Wal, CEO of Taxology, and Robert Welzel, Partner at WTS Global, emphasised that dealing with increased tax authority scrutiny is a very big topic nowadays. In the UAE, for example, there is a strong enforcement of FATCA and CRS adoption. A new law defines “non-compliant FI” and “non-compliant person”. Banks are forced by law to collect missing data of their customers within 30 days of onboarding as a part of the customer due diligence (CDD) process. Otherwise, huge fines are planned – USD 5,000 per customer, which is a large amount for a retail bank with many customers. Non-compliance by the bank is treated as a violation of the law. During the discussion, we learned that not only the beneficial owner but the entire surrounding economic set-up including family members is considered. There is a high granularity of data required by authorities, and financial intermediaries are being held liable to collect correct data. Additionally, global custodians have the liability for the correctness of all data along the chain. The panel concluded that there is an exponential increase in the number of enquiries by tax authorities and that tax authorities have significantly more resources per customer for processing these enquiries than banks do.

The second very important and extensively discussed topic was the latest trend towards total tax transparency due to the Crypto-Asset Reporting Framework (CARF) coming into force. Hywel Griffith, Technical Advisor (CARF) at HMRC, and Corinna Hedtke, Director and Regional Lead Client Tax Information EMEA at Standard Chartered Bank, discussed questions around CARF and CARF interaction with CRS 2.0 with Abdullah Bhana, Senior Policy Advisor at HM Treasury. With CARF, the number of reports and amount of information that has to be collected is increasing dramatically. The information is very comprehensive and is kept for an indefinite period of time, which leads to a huge amount of data being accumulated over the years. In addition, everything is changing very rapidly in this area – new products and even new asset classes are appearing on the market fast while other existing products are disappearing from the market at a similarly high speed. This leads us to the question: Where is the limit? The panel concluded that there are still many uncertainties, e.g. CARF vs. stocks & bonds on blockchain – what is the difference? How can spillovers be prevented? There are still many unanswered questions, which does not make it easier for financial institutions to deal with this topic.

Subsequently, Steffen Gnutzmann, Partner at WTS Global, and Gohar Khan, Partner at KPMG and responsible for the Asset Management & Operational Taxes team, examined recent developments in the area of EU WHT reclaims and showed that there were completely different approaches to this subject in different countries across Europe. As a result of these different approaches, the European Commission launched a public consultation on the EU WHT framework in late 2021. Among other things, the issues included costly and inefficient procedures, lack of clarity regarding documentation requirements, lack of digitalisation as well as reliance on a paper filing system.

Following initial feedback and a questionnaire stage, the consultation has moved to a third stage with the Commission being expected to publish the draft legislation, the FASTER proposal, on 28 June. The aim of the EU initiative is to streamline what are considered to be burdensome withholding tax relief procedures for cross-border investments in the securities market. The next steps are the European Commission’s draft legislation on 28 June 2023 followed by the consultation on the draft legislation.

There was a large panel of high-profile experts discussing how to prepare for amendments to the Common Reporting Standard (CRS). Jenny Turner, Executive Director Group Tax at UBS, Paul Worlock, Anti-Tax Evasion/Operational Tax Director at NatWest, David Smith, CRS Lead at HMRC, Martin Killer, Financial Services Tax Partner and Head of Operational Tax at Grant Thornton and Chloe Tuffin, Director at Deloitte, entered the discussion dealing with the question about the influence of CARF on CRS and vice versa, since – alongside the publication of the CARF in 2022 – the OECD also published amendments to the Common Reporting Standard (CRS) which will be implemented by participating jurisdictions. Some of the highlights of this publication include electronic money accounts, which were included in the scope of CRS, the treatment of the e-money providers as depository institutions, the introduction of Central Bank Digital Currencies (CBDC), the definition of crypto-assets as financial assets, the inclusion of additional data points in CRS reporting as well as additional CRS due diligence requirements.

The effective implementation of the Central Electronic System of Payment Information (CESOP) was discussed in the panel with Gary Campbell, Tax Partner, Tax & Legal at Deloitte, Olivia Boyle, Associate Director, Tax & Legal at Deloitte, and Tom Howgate, Director at Deloitte.

The fact is that from 2024 onwards, all EU payment service providers (PSPs) will be required to record and report transactional data for cross-border payments. The main concern in the discussion was how to deal with the increased number of transactions within the scope of CESOP and how to ensure that the systems are prepared and can withstand the strain of extra data reporting requirements. The timeline for the implementation is very tight – this reporting regime will come into force in January 2024. Thus, the question is what firms should do now to increase efficiency while managing external stakeholders and their interests as well as balancing reporting compliance with data protection requirements. This reporting regime could be seen as “FATCA and CRS on steroids”, since it requires quarterly line-by-line reporting of all transactional data for all cross-border payments. The European Commission has prepared penalties for not filing, filing incorrectly, or overfiling. Expected differences between Member States, similar to CRS in terms of files (size, format, XML scheme) and reporting procedures, submitting transactional data to 20+ tax authorities as well and monitoring the changes per country were seen as huge challenges in this regard.

In the last conference session, chaired by Susanne Rauscher-Nwokedi, Senior Business Analyst at SDS, and attended by Mathias Frostholm Kristensen, Head of Unit at Skattestyrelsen (the Danish tax agency), and Tom Howgate, Director at Deloitte, the question of how tax administrations are improving tax processes for businesses and customers was raised. In a short overview, Mathias described the quick refund process, which is being used at the Danish tax agency. The EU initiative for standardisation and simplification of the withholding tax reclaim procedures in the EU, better known under the acronym FASTER, was the main subject of discussion. Tom Howgate emphasised three building blocks of the initiative:

• Documentation – standardised digital TRC (Tax Residence Certificate)
• Report – standardised XML sent to the corresponding tax authority
• Reporting process – relief at source (TRACE) or quick refund

Changes in the TRACE regime are expected, which may include the reporting of acquisition costs and the introduction of intra-year reports. Apart from that, the question of the actual beneficial owner will still remain a difficult one to answer.

CONCLUSION

• Again, this conference proved to be a platform where the current hot topics in the tax industry are discussed. The conference attracted industry professionals, tax experts, and tax authority representatives from across Europe.
• All topics discussed are more than relevant for the entire financial industry and will keep us all very busy in the next months and years.
• As a technology and software solutions provider in the area of international tax and regulatory reporting for FATCA, CRS, QI, OECD TRACE, and WHT, SDS was delighted to sponsor this excellent industry event and to actively contribute to all expert discussions.

Feel free to contact our sales managers anytime for further information, an expert chat, or any discussion about the topics mentioned above.

This event was aimed at investment firms and the fund industry and provided deeper insights into and prompted discussions about fund structures and the future UK funds regime, trying to predict future tax developments and digging deeper into the practical benefits and potential disadvantages of new investment vehicle classifications.

International regulatory and substance requirement developments were explored. OECD Pillar Two requirements and exemptions for firms in larger consolidated group structures constituted the main discussion topics. Authorities’ greater focus on shell companies was also debated and it was concluded that there are still many uncertainties regarding the expected approaches of different authorities to this topic. There was a lively discussion about the difference between the taxes of the UK and those of Luxembourg, especially in terms of complexity. With regard to that aspect, the debate showed clearly that Luxembourg, with its straightforward and very simple tax rules, was favoured by most participants.

Managing changes to tax risk and governance was a big issue at this conference, as it is at many other tax conferences, too. How to anticipate regime changes and implement a forward-looking process was identified as one of the biggest challenges of the industry these days. Embedding proposed frameworks into current processes and monitoring tax risk profiles while aligning them with those of the whole company – paired with the question how to shape the tax team and skill set to cope with stricter compliance obligations – was seen as an extremely challenging and time-consuming task in all organisations.

An international outlook on withholding tax developments was discussed in one of the most interactive panel discussions with participation of Susanne Rauscher-Nwokedi from SDS. The analysis of a future harmonisation of the EU withholding tax regime – followed by an exploration of European Commission proposals and potential challenges of implementation – raised a discussion about the need for such a harmonised regime. The main question was how to capitalise on EU withholding tax reclaims. A broader debate was sparked on TRACE and its implementation successes and problems. It is obviously still necessary to convince the various actors on the market that a harmonised EU withholding tax regime is for the benefit of all stakeholders – individual investors, the financial industry as well as tax authorities.

The industry is seriously concerned about how to cope with an increased number of audits and authority scrutiny since authority investigations are becoming more frequent and more detailed. Thus, finding solutions to compliance issues and control failures by raising risk awareness of capital gains and transaction taxes has become of paramount importance for the industry.

There is a consensus in the industry that for emerging challenges related to tax data and documentation, technological support is inevitable and invaluable. Coping with increased scrutiny and the question how the automation of tax processes and the increasing reliance on technology can be beneficial are the predominant issues the industry is dealing with. Establishing internal consistency and transparency of data in order to cope with additional reporting and compliance requirements is the prerequisite to ensure internal data verification and consistency.

During the last conference session, which was organised as a “fireside chat”, panellists looked ahead to regulatory developments that financial institutions should be aware of and discussed amendments and the expansion of tax information exchange regimes, including the Common Reporting Standard (CRS), solutions to potential challenges of the Crypto-Asset Reporting Framework (CARF) and developments in Blockchain. At the end, the panellists expressed their wish for the establishment of the UK to become an attractive prospect for investment funds following Brexit.

CONCLUSION

This conference gathered high-profile industry experts from the fund industry and gave a broad overview of the current and expected developments and challenges the fund industry is already facing and will have to deal with in the future. Currently, the industry is facing a lot of uncertainty and its perspectives are strongly dependent on finding a way to cope with a higher number of audits and more authority scrutiny. One of the ways is the increased use of technology for collecting and validating data and preparing it for reporting in an automated way by means of standardised applications and intelligent data processing including the utilisation of artificial intelligence (AI). All attendees agree that this is anything but a simple task and will tie up many resources that will be missing for operative work.

Observation by:
Hrvoje Kajzer

Feel free to contact me at any time for further information, an expert chat or a discussion about any of the above-mentioned topics.

The conference marked the beginning of the return to onsite events and gathered the “hard core” of more than 35 experts in taxation, reporting and digitalisation of tax. The participants were happy to meet old friends, to join in on different conversations and to actively participate in numerous interesting sessions and panel discussions. It was very important for us from SDS to finally meet people in person again, to exchange information with the community about the latest developments and requirements in the operational tax arena and to join expert talks.

On the agenda was a mix of standard tax topics, new tax developments and topics related to the digitalisation of tax and crypto reporting. After listening to the opening words of Peter Grant from KPMG, we enjoyed a very interesting speech by Mark Huyan from JP Morgan. He presented and explained CARF (Crypto-Asset Reporting Framework) and the current status on OECD public consultation in this matter. The talk included a critical review of the challenges in regard to reporting in the crypto world, which is anonymous by design.

The conference proceeded with an overview of the digitalisation of tax, followed by a discussion about current expectations around meeting audit requirements, especially in regard to meeting the new requirements concerning CRS (Common Reporting Standard). Environmental taxes and ESG tax developments across Europe were also part of a short discussion.

The second half of the day was dedicated to OECD TRACE. Katja Pussila from Vero Skatt (Finnish Tax Administration) presented astonishing, positive results from the first year of the TRACE regime in Finland. In summary, individual investors already benefitted exceptionally well from TRACE in the first year alone. This proves that there is no reason not to adopt TRACE throughout the EU. This talk formed a solid basis for the next vivid panel discussion, which featured the SDS tax expert Susanne Rauscher-Nwokedi. She explained how the OECD TRACE initiative could be integrated at EU level and which measures would be needed for such a wide-scale adoption of TRACE.

Conclusion:
From the point of view of SDS, it was a very successful event which enabled us to meet our colleagues from the operational tax community in person and to discuss current and future developments in the tax arena.

Observation by:
Hrvoje Kajzer

Feel free to contact me for further information, an expert chat or any discussion about above-mentioned topics.

Some highlights from the conference:
SDS booth

Panel discussion about the future of OECD TRACE at EU level with SDS panellist Susanne Rauscher-Nwokedi.

Katja Pussila of Vero Skatt (Finnish Tax Administration) presenting the outcome of the first TRACE reporting in Finland this year.

In the lights of pandemics this event has been held as an online-only event, thus unfortunately without physical booths and physical contact opportunities.

Chairperson’s Opening Remarks by Peter Grant, Partner at KPMG UK provided an overview on how many topics are still continuously increasing the pressure on the industry and tied up resources. He stated that the share volume of operational tax developments and changes that are still taking place had been astounding. His list of the top 10 of what we are seeing at the moment comprises DAC 6, OECD MDR starting to pick up in the UK, South Africa, the Channel Islands, Mexico and so on, DAC 7 & DAC 8 on the way, over 200 changes related to FATCA and CRS in the last months, TRACE in Finland, Germany’s plans to introduce a similar but different regime to TRACE, new FTT in Spain, over 300 DTT changes across various jurisdictions, increased technology impact to tax, rules impacting IRS QIs and Brexit continuing to impact the whole UK market and at the end tax authorities asking banks more and more difficult questions.

Hereafter I wanted to reference to some of the most interesting sessions which covered the newest developments and at the same time gave us a short- to mid-term outlook of the future challenges.

James Marshall from HMRC provided an HMRC Update on DAC 6 and Mandatory Disclosure Rules. UK has implemented DAC 6, and is in the process of introducing MDR. Both regimes require reporting of certain types of arrangements and structures with some differences in what has to be reported and both regimes rely on exchange of information between implementing jurisdictions. The first reports under the DAC 6 regime were due in January 2021. MDR is announced and expected to come into effect in 2022. There are a lot of similarities between the rules, but also a number of important differences. Primary reporting obligation is on “intermediaries”. If no intermediary has to report the information, the obligation fails on the “relevant taxpayer”. Reports can be sent to HMRC via the portal on gov.uk. Current status is ongoing reporting, monitoring and governance and preparation for MDR.

Financial Transactions Tax implications have been explained in a very pictorial language by Mark Huyan, Executive Director Tax at JP Morgan in London, based on the Spanish Financial Transactions Tax. At the time the Spanish parliament approved the FTT legislation in 2020 we had a global pandemic and US elections on the horizon, thus at that time there was one key message that industry gave to the Spanish authorities and it was “give us time”, since operational processes are technology driven and they just take time. The Spanish authorities gave the industry three times three months time to implement the legislation instead to say from the day one “you have nine months”. This would lead to more strategic decisions within the industry and at the end of the day all financial institutions would have better systems and processes in place. That would ultimately not only benefit financial industry but also the tax authorities as well.

Tom Howgate, Director at Deloitte explained us the recent changes to FATCA reporting requirements in relation to missing US TINs which have caused some operational issues. He also updated us on the ongoing consultation in relation to potential future changes to CRS reporting. The cnsultation is currently being given to whether other information, which is expected to be held by a financial institution, could be reported under CRS to help tax authorities better understand the context of the information they are provided. Tom also reported that OECD peer reviews were placing pressure on tax authorities around enforcement of compliance and requirements to review compliance periodically. The concequence of all these expansive requirements is that the cost of compliance is rising.

In the next session Gohar Kahn, Tax Partner at KPMG provided an update on withholding tax and potential post-brexit impact. He brought us two examples: Indian withholding tax and South Korea treaty reclaims for mutual funds. EU withholding tax reclaims had been tackled with an emphasis on the different rules and different treatment in different countries what leads to unequal treatment and discrimination and affects the EU principal of the free movement of capital which is the key element of the European Union. Talking about the impact of Brexit for UK funds in summary it could be said that withholding tax exemptions in some EU countries, e.g. Italy, Poland, Spain and Sweden, may be lost. This was a very insightful overview of withholding tax treatments internationally and within EU.

The panel discussion as an update about the TRACE implementation, chaired by Peter Grant from KPMG and atttended by Katja Pussila, Risk Manager at Finnish Tax Administration, Rupert Brandstetter, Product Manager at SDS and Paul Radcliffe, Partner at EY was a very insightful exchange of practical information between very experienced industry experts. Katja gave us a context and background on TRACE and the perspective how the journey to the implementation in Finland had been for the Finnish Tax Administration. It is very important to understand that TRACE was codeveloped by OECD, business and member states as a unique standardised model. The biggest benefit of TRACE is that it comprises all the elements of what you have to do when you have identified the investor and beneficial owner, what is the role of the AI (Authorised Intermediary) and reporting – and reporting is actually the key. With other words TRACE is about a standardised, international model for implementing treaty relief at source. In the long term the success would mean that the majority of investors would get the treaty benefits at source. Paul added his perspectives on the development of TRACE and in his view TRACE has been developing relatively slow. And the reason for that is in timing. If we go back in time at the very beginning of TRACE in January 2013 when OECD approved the TRACE Implementation Package, the focus of governments and authorities in the aftermath of the financial crisis 2007/2008 was on compliance and AEoI. At that time the FATCA regime has just started, followed by CRS and an absolute shift in focus was the main reason for TRACE to develop so slowly. Rupert gave us the technology view on TRACE and especially on reporting part of it. From technology point of view much of that is already on place for other regimes like e.g. QI. It’s just additional information you have to retrieve. For the reporting part many financial institutions are still in the process of making decisions whether to buy a standard solution or build something on their own. TRACE is similar to FATCA and CRS with regard to the XML schema, but it’s to expect that there will be a lot of country-specific deviations like we have seen them for CRS. Let’s assume that TRACE will be adopted in all EU countries. In that case the difference to CRS would be that with TRACE there would be 27 different files to 27 different authorities with 27 different rules (timelines, scope etc.). This adds huge complexity to TRACE reporting, thus TRACE will be a game changer and many banks are currently considering to change their reporting landscape, especially to abandon their tactical solutions developed on their own and to search for a standard vendor solution which plays all pieces.

CONCLUSION:
Despite the fact that it was an online-only event all sessions and especially panel discussions were very dynamic and vivid. The sessions provided us a fantastic overview of the current and future tax challenges in different tax regimes and led us through tax reporting landscape of three, four and five letters abbreviations like DAC 6/7/8, FTT, DTT, FATCA, CRS and TRACE. We have seen that on the one hand reporting regimes are getting more and more complex and on the other hand the scrutiny of tax authorities is getting more sofisticated and the question they ask more difficult to answer. Thus, there is an obvious trend on the market towards standardised technology-supported solutions which are capable of dealing with today’s reporting obligations and flexible and scalable enough for the challenges of tomorrow. This is where SDS can help – as one of the leading standard software vendors with a longstanding expertise in providing automated reporting solutions for OECD CRS, FATCA, QI, and TRACE.

Observation by:
Hrvoje Kajzer

Feel free to contact me for further information, an expert chat or any discussion about above-mentioned topics.

 

Panel discussion “TRACE – Implementation Update & Industry Views.”
Rupert Brandstetter from SDS participated at the panel chaired by Peter Grant from KPMG and attended by Katja Pussila from Finnish Tax Administration and Paul Radcliffe from EY.

On 21-22 October 2020, the first virtual SDS Community Forum took place with the active participation of international SDS customers and business partners. The concept of bundling expert and management rounds – previously organised on a product-specific basis – in a cross-portfolio event was realised in a completely digital form. This was on the one hand due to SDS’ promise of “Setting Digital Standards” and on the other hand, of course, due to the current pandemic framework conditions. The two virtual days of the forum were characterised by professional and exciting content. According to the motto of the event “Shaping the future together”, SDS also presented (additionally to the current highlights and future-oriented projects regarding the SDS product and service portfolio) a multitude of topics from the areas of securities processing with a focus on corporate actions and settlement, regulatory reporting, cost transparency as well as securities compliance and invited to regulatory focus sessions on SHRD, CSDR and ECMS. The programme was rounded off by cross-cutting issues such as process optimisation, project reporting, cloud readiness or testing innovations.

The number of participants surpassed the expectations and goals of SDS. The feedback of the customer community on the individual sessions – in terms of content as well as format – was thoroughly positive. The interactive exchange of lessons learned, expectations and new ideas via the digital event and interaction tool worked excellently and was well accepted by the participants.

Niv Graf, Head of SDS Service Delivery Management and organiser of the event, adds: “With the SDS Community Forum, we have successfully established a new interactive format for our customer community. We are very satisfied with the results regarding acceptance, dialogue and feedback quality. We will continue to use and enhance the SDS Community Forum as a platform for cooperation and exchange, but also for criticism, ideas and challenges. SHAPING THE FUTURE TOGETHER: Nomen est omen.”

The various industries, in particular the financial industry, cannot agree on a common tenor as to where the AI journey should lead. There is, however, consensus that modern learning algorithms have the potential to turn the industry completely upside down.

When Alibaba founder Jack Ma and Silicon Valley legend Elon Musk presented their ideas of artificial intelligence at the World Artificial Intelligence Conference in Shanghai last week, their views could not have been more different.

STATUS QUO AI: MOMENT SHOTS.

The current trend traces back to the first conceptual approaches in the 1950s, but the developments of the last decade in particular have led to numerous new attempts and breakthroughs in the implementation of artificial intelligence. The main drivers are the exceptional growth of data volumes data volumes as well as groundbreaking developments in IT hardware.

While the first big steps in face and image recognition have put AI back into the focus of public interest, it is now big data clusters such as the ones of Google, etc. which define the market standard.

The financial industry is particularly interested in the AI potential. On the one hand, this is due to the expectations of its customers and regulatory requirements and, on the other hand, even more due to the available data volumes in the banking companies – precisely these volumes turn out to be the most essential advantage compared to new FinTechs.

Nowadays, the concept of AI is a very broad one and constitutes an umbrella term for the topic of intelligent procedures. Machine learning (ML) is already seen as a more narrow term of artificial intelligence and comprises, for instance, clustering or regression procedures. The most elaborate, sophisticated and data-intensive level is referred to as deep learning (DL), which uses complex neural networks. AI is not able to act intuitively, but cognitive performance is enabled by training models.

It is striking that the term robotics is repeatedly used in connection with machine learning, even though it actually rather corresponds to a sequence of instructions and should thus be placed in the nomenclature of AI at best. A chatbot, however, can very well be regarded as an implementation of ML considering corresponding technological aspects.

Nowadays, more than 2.5 trillion bytes of new data are generated on a daily basis. If one were to print out this amount of data, the distance between the earth and the moon could be covered multiple times. The computing power available today makes it possible to process these data volumes. Banks do not primarily see their duty in basic research – instead, the focus is on the effort to integrate intelligent additions into existing and new applications. Required frameworks are obtained from commercial but also from free sources.

By now, there are numerous abstract examples for artificial intelligence, in particular complex procedures such as idiomatic translations as well as autonomous vehicles or sensor-aided learning. In the financial world, intelligent fraud prevention measures, e.g. for preventing credit card fraud, money laundering or the identification of digital identities (using similarities of names for fraud purposes) have prevailed. Text processing as part of document scanning or chatbots is particularly popular in the industry.

Current general AI market trends:

• Knowledge graphs – connecting different objects from a complex, unstructured data volume in a systematic way. Data is not saved in simple sequences, but in individual, partially connected nodes.
• Hypermind – summarises sensor-aided AI. Primarily, projections/augmented reality (glasses similar to “Google Glass”) in combination with image recognition support people in their activities.
• Multimedia opinion mining – is the umbrella term for multimedia segmentation, which clusters media according to personal opinions, preferences or feelings. For instance, negative news can be mitigated or defused in combination with a positive image. The spreading of fake news can be considered a negative example for this type of AI.

Currently, the financial industry still focusses on more tangible approaches such as:

• The intelligent automation of credit ratings
• AI processing of text documents
• Automated payment transactions according to default classification

Apart from this variety of chances, financial institutions are increasingly facing a large number of obstacles. In particular, the results are often not traceable, which primarily poses a problem to the supervisory and data protection authorities. Although autonomous learning processes ideally lead to seemingly correct results, they cannot be consistently checked for their causality and the corresponding decision-making basis.

Some first promising attempts at a solution to this problem are approaches regarding the textual output of important decision nodes, i.e. a kind of logging, which is intended to allow for a certain degree of traceability. This approach, however, is still in the early stages of research. The visualisation of (interim) results is a process which is significantly easier, although it will not always lead to plausible explanations.

The ethical component of artificial intelligence involves another substantial obstacle. A well-known and controversial example of this can be found in the recognition software of autonomous vehicles. Demonstrably, such systems had trouble detecting pedestrians if they did not match the typical white person. Particularly, darker skin tones were detected far less easily. This malfunction can be traced back to the selective choice of test data. The problem of such biased data will also affect the financial industry in one way or another, for instance in AI-supported lending, and the industry will have to deal with it accordingly.

CONCLUSION

It is a fact that financial institutions have made very little use of their AI potential so far, which is hard to understand given the enormous data volumes at hand. Artificial intelligence is in another heyday which – as recent progress has led to believe – will persist (unlike in the past).

Read more about this topic and the digression to PSD2 and GDPR in connection with artificial intelligence in our SDS Report. Download the report on the subject AI in Banking now.

Speaking of tradition: This year, the SDS GEOS management circle took place for the last time in its current form. Due to our growing portfolio and the fact that several of our products are often used simultaneously, we have decided to hold one joint event for all our products from next year onwards. But now back to the content of the management circle:

SDS is a sound, organically growing company

The most important news first: We can present steady growth in all areas of our portfolio over the past years. The number of employees, the turnover and the EBIT have increased according to plan and we have reason to believe that we can continue this success story in the years to come. This shows that our decision to expand the portfolio a few years ago was the right one and it gives our customers the reassurance that they have a long-term stable and attractive business partner.

Optimising the data volume for securities master data

The number of available securities on the market for index certificates and warrants is in no reasonable proportion to the instruments actually purchased by investors. This issue has been a topic of discussion across the industry for several years now. Recent analyses paint a dramatic picture: On the Austrian market, ÖWS provides more than two million instruments, over 90% of which belong to the aforementioned securities types. Only about 1% of these, however, have actual holdings. The rest – about 90% of the FI master data – is irrelevant for securities processing. This useless data volume has become a serious organisational and technical problem.

Therefore, it is an obvious idea to remove the unneeded master data or to only provide it on demand. At first glance, this task may seem manageable, but it requires thorough analysis of the affected processes as well as coordination between all parties concerned and it is probably not entirely trivial from a technical point of view either.

In the weeks to come and in collaboration with ÖWS and the Austrian banks, we will work out a solution which takes the technical and financial framework conditions into account and which is likely to offer an attractive business case for all parties involved.

Event-driven architecture

In addition to this current topic, we have focused on the future architecture of our company’s software products. We are faced with multiple challenges:

• The way our product portfolio is expanded creates the demand for an ideal architecture for the interaction of these components during joint usage.
• Modern user experience requires technologically advanced functions such as full-text search, statistics, configurable dashboards, etc.
• External systems should be able to react to status changes in the transaction processing system near time.

In order to accommodate all this, we are currently verifying a so-called event-driven architecture within the framework of a proof of concept (PoC). The core of this architecture is the relief of a transaction processing system (in our case SDS GEOS) from the preparation of data for user interaction, the creation of statistics and complex queries as well as from the process of making data available to external systems.

We have already taken steps in this direction in the past (for instance by supplying data for the Business Information Store) and we now intend to implement the interactions via front-end and the communication of changes back to SDS GEOS. The PoC deals with a specific task from the area of Corporate Actions and should ideally be further developed into a corresponding product for the processing of corporate actions. For this step, we are looking forward to a development partnership with a renowned financial service provider from custody business.

Gossip

In addition to these topics, informal communication over brunch and during the breaks was, of course, not neglected either. Since the composition of the circle has changed compared to last year, we were also able to welcome some new members to the community, and we are looking forward to an exciting and successful collaboration.