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Accessibility to markets also depends on fair exit requirements, in particular when financial contracting requires an exit as part of the renegotiation process. Exit procedures are all those rules or actions that are (directly or indirectly) involved in exiting a financial transaction. The objective of these procedures is to lower the transaction costs involved in the renegotiation of a financial contract. Such procedures may include collection or refund of withholding taxes on dividends, exit rights for investors (investment products) or exit charges, among others.

Definition

Investors may enter a financial transaction for several reasons. However, over time, these reasons may evolve and the conditions that were favourable when entering the contract may change. Contractual conditions usually set the procedures for exiting a financial transaction, especially in the case of more intermediated financial instruments, such as investment products. For plain vanilla products, the ability to exit is defined by the liquidity in the market and thus might just require the immediate execution of a sale transaction at market price. Investment products, however, might consist of multiple investments and thus exit procedures might be burdensome. Transparency of exit conditions and charges are overly important to shape incentives, especially in a cross- border setting, where investors might have to deal with a different language or multiple exit conditions in different countries that are often left to multiple national legislations. Transparency and simplification should be the guiding principle to ensure that exit procedures are fair and do not add unnecessary costs to cross-border transactions. The extent of application of these principles should also depend on the investors to whom these products are potentially addressed. As for the disclosure requirements for entry

purposes, the fair implementation of exit rights would also be one of the defining aspects of a good quality distribution channel for investment products.

Taxation also plays a role in the renegotiation (exit) of a financial transaction. In the contracting phase, the ex ante incentives that taxation may create are very important, especially if they provide a bias towards specific instruments (debt versus equity, for instance). Nonetheless, taxation might become a source of concern for cross-border transaction in particular when it comes to collection and refund procedures of the withholding tax. In particular, the concern is with the different procedures adopted by member states, which can be rather costly and lead to substantial costs. The European Commission (2009, 2015e) reports three major costs generated by the complexity of the withholding tax reclaim procedures: an opportunity cost due to delayed claims and payments estimated at €1.84 billion per year; €5.47 billion per year of tax relief that is not reclaimed; and administration costs related to the reclaim procedures of about €1.09 billion per year. This complex and fragmented procedure thus costs in total roughly €8.4 billion per year. This is a significant cost that is passed onto investors, plus the negative incentives for those investors that refrain from entering a cross-border transaction due to the additional or uncertain cost of going through burdensome local procedures to reclaim the tax. This kind of barrier provides cost predictability, as it puts a cap on pursuing the procedure that is equal to the value of the tax reclaim, but it is nonetheless expensive.

As a consequence of these additional cross-border costs, both the European Commission and the OECD have set up groups that have produced two reports with recommendations (OECD, 2013; T-Bag, 2013). In particular, among the areas identified by the two reports, regulators should prioritise the harmonisation of the following areas across the EU:

 The use of electronic processing (including online access, if possible).

 The standardisation of tax reclaim formats (even including the possibility to submit the form in English).

 The recognition of authorised intermediaries (AI)68 _{that can collect taxes or claim}

exemptions or reductions on behalf of their clients periodically, e.g. annually, on a pooled basis (using the Power of Attorney, PoA, tool).

 The acceptance of self-declaration of residence (instead of producing a certificate for every transaction).

 The creation of memoranda of understanding (MoUs) among national agencies to share information about fiscal residence and withholding tax reporting for the specific transaction, using a common identification system (also called Taxpayer Identification Number, or TIN).

Withholding tax procedures

68 _{The TRACE Implementation Package (OECD, 2013) suggests that the AI would need to be compliant with a list} of requirements and apply different sets of regulation to their own clients, such as know-your-customer rules, anti-money laundering rules, and so on. It would also be subject to independent reviews of its compliance by the source country (which can of course be different from the country where the intermediary has been authorised). Most important, the AI would have to set up different agreements with the various source countries where the AI operates.

These changes should promote the widespread use of relief-at-source mechanisms (ex ante), allowing also the possibility to look into case-by-case tax reclaims if a relief-at- source cannot be applied (but limiting it to well-defined exceptions).

Table 9. Selected examples of outstanding cross-border barriers

Cross-border barrier Nature Cost predictability Outcome

1. Withholding tax refund and collection

procedure Artificial Yes Action needed

2. Full disclosure of exit charges and

conditions Structural - Action needed

Note: This is not an exhaustive list of artificial and structural barriers to cross-border financial transactions. The set of exit procedures that may affect the costs of a financial transaction and (directly or indirectly) the incentives of an investor to enter a cross-border transaction is typically an area where policy-makers have not focused much in the past. Nonetheless, potential barriers in this area are highly damaging for cross-border trading, especially if there is no disclosure and they operate under conflicting national legislation. More work should be done to monitor and map market and supervisory practices in this area.

Outstanding barriers

Key findings #13.

 A well-functioning market ensures at all times that entities and financial instruments (admission procedure) can access markets based on fair and objective criteria, allowing contracting or renegotiation of a financial transaction at the lowest transaction cost.

Market entry

 Local supervisory authorities, in some instances, still apply discriminatory requirements based on nationality of the service provider, e.g. the use of local payment agents. For instance, more attention should be paid to supervisory practices in implementing open access requirements for market infrastructure. There are also examples of practices that may result in tax discrimination, which should be further investigated.

 Stricter oversight of execution policies is important not just for the quality of execution, but also to reduce barriers to entry for competing market infrastructure and brokerage services.

 Different formats and procedures also affect the integration of post-trading infrastructures, which are still imposing additional costs to cross-border versus domestic financial transactions. Corporate actions, among other factors, are a key source of such high costs.

Market exit

 Local tax procedures regarding the collection and refund of withholding taxes is a source of cost on cross-border transactions, which is estimated to top €8 billion per year. Bolder action is required to push member states to adopt harmonised and electronic collection and refund procedures.  Availability of exit rights and transparency of exit conditions are important aspects of a financial