Flaws in the EU Savings Directive will cost member states dearly
The new tax rules could bring in €10bn a year but significant loopholes mean they are unlikely to achieve their aims.
The European Union Savings Directive comes into force on July 1 but will this attempt to crack down on cross-border tax evasion bear any real fruit? Fourteen years in the making, this directive focuses on taxing savings income in the form of interest payments that EU citizens have squirreled away outside their home countries. It is aimed at individuals only, with a remit that extends beyond the EU and includes Switzerland, the Channel Islands and a number of offshore centres.
Good intentions
Experts suggest these new tax rules could net as much as €10bn a year for EU member states. A tidy sum, especially for those countries obsessed by EU budgets and growing deficits. But, equally, some suggest the directive is so full of loopholes that it is flawed from the start and is only expected to collect 10% of its potential at best.
The key loophole appears to be the exclusion of interest payments made to companies; discretionary trusts are already outside the legislation. So it comes as no surprise to learn that banks in Jersey and elsewhere, acting in the best interests of their clients, are frantically setting up corporate structures for their depositors. These companies, bankers say, are based in the Caribbean, take a few minutes to set up and cost about €400.
These companies can have bank accounts and depositors can, through this simple, cheap device, legally avoid the impact of the new directive.
More than 100,000 such companies are estimated to have been set up in the past six months, enabling high net worth individuals to avoid the implication of the new tax. Banks have been actively involved in setting up these company structures and argue they are acting in the best interests of their clients and in accordance with the law.
Legislative oversight
The law, however, appears to be fatally flawed in relation to its core objectives. Commenting on the loopholes, Maria Assimakopoulou, an EU spokeswoman, says the council of ministers will be able to review the directive two years after it is implemented.
The funds will be well out of reach by then, or perhaps moved to Singapore. The EU looks set to pay a heavy price for poor legislation.
