EU Savings Tax Directive, part 2

UK burden...

The UK already pays a lot more to the EU than it gets in return, and the bureaucrats in Brussels still want more! What are the benefits of being part of the EU again?

...leaked documents from the European Commission reveal plans to end the UK's special budget rebate and make London the biggest net contributor to EU funds ...paying 0.51 percent of its GDP, compared to 0.35 and 0.31 percent for Italy and France respectively. The idea of losing the three billion euro rebate - famously won by the then prime minister Margaret Thatcher in 1984 - will cause great concern in London. Current prime minister Tony Blair has vowed to defend the rebate and he knows that if Brussels is seen to be taking money back from the British tax-payers, his battle to win over a sceptical public on the European Constitution will be even harder.

Original article

Swiss secrecy

The Swiss have agreed with Brussels that they will provide legal assistance in cases relating to indirect taxation such as customs, VAT, and alcohol / tobacco levies, but will be exempted from providing such assistance in cases involving direct taxation. There may have to be a referendum on the matter, the result of which could revoke the provisional agreement.

Most dependent territories have agreed to adopt the terms of the Savings Tax Directive, but The Caymans Islands took their protest to the European Court and appealed to the United Kingdom government for concessions to compensate for potential loss of business arising from the application of the new EU regulations, although the jurisdiction has since agreed to accept the terms of the Directive.

Not committed..

The following jurisdictions, which have not yet made commitments to transparency and effective exchange of information, have been identified by the OECD's Committee on Fiscal Affairs as uncooperative tax havens, Liberia, The Republic of the Marshall Islands, The Principality of Monaco.

The directive also extends far beyond European shores to the Caribbean dependent territories of the United Kingdom and the Netherlands including Anguilla, Aruba, British Virgin Islands, the Cayman Islands, the Netherlands Antilles and Turks & Caicos, where the new initiative hasn't been greeted at all well by the offshore world.

The USA Federal Budget includes $50 million that American tax-payers send each year to the OECD. The OECD is focused on higher taxes around the world via their project to stamp out "harmful tax competition".

Sometimes referred to as the Detroit of Europe, though the Hong Kong of Europe might be more appropriate, Deutsche Welle recently labelled Slovakia as "A Monaco on the Danube". With a flat rate of 19% tax, Slovakia leads the EU low-tax competition and attracting foreign investors' eyes. Recently, south Korean car and appliance maker, Hyundai, chose Slovakia for a huge car factory. The President of the Centre for the New Europe in Brussels, recently re-visited Slovakia and came back most enthusiastic. Said Evans: "The Slovak economy is doing well. Growth is well over 4% and unemployment is coming down steadily. Whilst the traditional liberal centres such as Bratislava are doing very well, wealth creation is also clearly permeating the villages and rural areas. With a low flat tax, booming manufacturing, and it's service sectors, Slovakia is justified in its reputation of being the new Hong Kong of Europe."

EU Savings Tax Directive, July 2004

What is it? Summary of the Directive's planned scope

The EU Savings Tax Directive, first proposed back in 1997, was planned to come into effect on 1st January, 2005, applying mainly to bank deposits of individuals - the obligation being for banks within the EU to deduct a with-holding tax, on interest paid, at source.

The tax rate will probably start at 15% climbing to 30% where an EU citizen is tax resident (or deemed tax resident) of one EU country and has money on deposit in a bank within another EU country's jurisdiction. It is important to note jurisdiction as the bank does not need necessarily to be in the EU itself.

There are ongoing discussions with Switzerland and others and the Directive are not finalised as yet but you can be sure that tax changes are coming. We are recommending that EU tax residents with offshore bank deposits consider their respective situation carefully and seek professional assistance or advice.

Switzerland, also Andorra, Monaco, San Marino and Liechtenstein have all agreed to put in place equivalent measures to those to be applied by the EU's Member States regarding the taxation of income from savings.

The EU planning is based on the need for a co-ordinated action to tackle 'harmful to them' tax competition. The OECD was started at around the same time. In 1998, a co-existence model was put forth, requiring each Member State to either operate a with-holding tax or provide information on savings income to other Member States, or to operate both systems.

Under the terms of the Directive:

  • All Member States will ultimately be expected to automatically exchange information on interest payments to non-resident individuals. All Member States, except Belgium, Luxembourg and Austria, will immediately introduce a system of information reporting. These three countries will be entitled to receive information from the other Member States.
  • The Directive has a broad scope that covers interest from debt-claims of every kind whether obtained directly or as a result of indirect investment via collective investment undertakings and other similar entities.
  • The Directive will apply from 1st January 2005, provided that agreements with certain third countries (Switzerland, Andorra, Liechtenstein, Monaco and San Marino), for equivalent measures and with Member States dependent or associated territories for the same measures or the same as those applied by Belgium, Luxembourg and Austria (see next paragraph), will apply from that same date.
  • Belgium, Luxembourg and Austria will introduce a system of information reporting at the end of a transitional period, during which they will levy a withholding tax at a rate of 15% for the first three years and 20% for the following three years and 35% thereafter. They will transfer 75% of the revenue of this tax to the investor's state of residence.

Belgium, Luxembourg and Austria will implement automatic exchange of information:

  • if and when the EC enters into an agreement by unanimity in the Council with Switzerland, Liechtenstein, San Marino, Monaco and Andorra to exchange of information upon request as defined in the OECD Agreement on Exchange of Information on Tax Matters (as developed by the OECD global forum working group on effective exchange of information in 2002) in relation to interest payments, and to continue to apply simultaneously the withholding tax and
  • if and when the Council agrees by unanimity that the United States of America is committed to exchange of information upon request as defined in the 2002 OECD Agreement in relation to interest payments.

Tax avoidance

The tax system agreed thus far by the recent Ecofin meeting would ensure that EU residents are taxed on the interest earned on their savings, regardless of where in the EU their money is deposited.

Currently, many EU residents deposit their savings with banks in Luxembourg because the Grand Duchy there operates a policy of secrecy similar to that of Switzerland. Luxembourg will not reveal details about these bank accounts to tax inspectors from other EU countries.

Since the savers will only have to pay tax on the interest from their savings, if they are honest persons they will declare it all to the tax authorities in the country where they live, scope for abuse of the system therefore exists.

Luxembourg's objection

Luxembourg has long been dependent on its banking business, and consequently fears any Brussels legislative changes that may cause that business to diminish, it is therefore fighting hard against the European Savings Tax Directive. Some analysts say that such a tax system within the EU would lead to a flight of capital into non-EU principalities where bank secrecy is maintained, an argument the Grand Duchy applies.

The Savings Tax mechanism

The mechanism recently agreed by ministers is based on a 15% with-holding tax on savings income during the first three years, rising to 20% for the remainder of a 10-year transition period.

The country applying the tax would retain 25% and pay 75% of the amount to the EU country where the saver lives / works.

After 2010, when the transition period is over, savers will be taxed by the country in which they live, regardless of where they keep their savings.

By 2010, it is anticipated that standards would be in place for the exchange of information among EU tax authorities, part of the Agreement reached.

The affect on EU residents

They will need to learn the difference between residence and domicile. It may be the case that a person is temporarily working abroad, with every intention that he/she will return home at the end of his/her contract of/for services.

As an example, a British person may currently be deemed to be a non-UK resident for tax purposes, and accordingly not have any liability to UK taxes, but may not necessarily absolve him/her, or his/her Bank from making statutory income tax returns of earnings, or income [deposit interest earned abroad], just because he/she has been out of the UK for most of the fiscal year.

Capitol flight? First signs?

Research conducted by accounting firm KPMG has found that one third of private banking institutions are planning acquisitions in the next three years, with the Asia Pacific region identified as a particular hot spot as bankers look to escape increasing tax and legal burdens in Europe and USA.

Isle of Man and Malta - new markets

Recent changes in the regulatory structure of the e-gaming sector in the Isle of Man and Malta have been successful in attracting some big name players to these jurisdictions.

Conclusion

It remains to be seen quite how far this with-holding tax on EU resident's bank interest on savings deposits will go. It is likely that most EU residents will not be able to do much about it, and for the EU, any country or countries which have lower tax rates will become very attractive potentially causing a flight of capital out of the EU.

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