The European Securities and Markets Authority (ESMA) has recommended legislative change to enable National Competent Authorities (NCAs) to share information with tax authorities, but abandoned proposals to enhance NCAs’ supervisory powers to tackle threats to "the integrity of the financial markets as a whole".

ESMA published its Market Abuse Regulation (MAR) Review report and its Final Report on Cum/Ex, Cum/Cum and withholding tax reclaim schemes on 24 September 2020.

No additional regulatory powers

ESMA’s decision against giving NCAs “the power to investigate and sanction unfair behaviours carried out by regulated entities that represent a threat to the integrity of the financial markets as a whole, beyond insider dealing and market manipulation” is to be welcomed.

Market participants had voiced concerns over the fuzziness of the concepts used, the resulting lack of legal certainty likely to hinder, rather than help, the functioning of financial markets. Moreover, both of ESMA's reports – quite rightly – point out that dividend arbitrage, cum/ex, cum/cum and withholding tax (WHT) reclaim schemes are primarily a tax related issue to be addressed at the level of individual Member States.

Tax authorities, rather than NCAs, have the required expertise to identify, assess and, where necessary, counteract relevant schemes. So, putting relevant information at the tax authorities' disposal is key.

Information sharing

ESMA recommends that the European Commission should propose legislation to “remove the legal limitations for NCAs to exchange with tax authorities the information obtained through cooperation and information exchange mechanisms from other NCAs within the EU [and] provide a common legal basis for the exchange with the tax authorities of the information directly received by the NCA within its national supervisory activity.”

The exchange of information between different authorities should have a clear legal basis. It is open to any Member State to enact legislation that allows its NCA to share domestic information with the local tax authority, but this is not required under EU law. Moreover, under EU law, there is no basis for an NCA to share transactions reports or suspicious transaction and order reports received from another NCA with its local tax authorities. ESMA has asked the European Commission to propose legislation to address both of these points.

A third point which cannot easily be addressed is the on-sharing of third country information. ESMA notes that “Internationally accepted standards in the field of cooperation and information exchange amongst NCAs and third countries authorities currently do not allow for onward sharing of information to tax authorities.”

My prediction would be that, in time, the OECD may take up the baton to formulate a proposal for rules on the international exchange of information between tax and other regulatory authorities.

Advice to the Member States

Having acknowledged that dividend arbitrage schemes are primarily a tax related issue for individual Member States to address, ESMA does, however, provide some advice.

• Member States should consider amending their laws “to directly and automatically link any given tax reclaim to the underlying distribution of dividends or entrusting a single entity with responsibilities over collecting the WHT and issuing the relevant certificate”.
• ESMA also refers to the OECD’s Treaty Relief and Compliance Enhancement (TRACE) Implementation Package (which, broadly, envisages that an authorised intermediary may claim WHT relief for its customers on a pooled basis, subject to providing an annual report on the relevant payments and their recipients). Whilst the aim of the package was to facilitate investors’ WHT reclaims in the context of multi-tiered holding environments, ESMA notes that “should it be applied correctly, it could minimize costs for all stakeholders and ensure compliance with tax obligations”.