What is it?
The EU is proposing to amend the Savings Tax Directive to close loopholes and “eliminate tax evasion”. The directive, which came into effect in 2005, forces banks and other financial firms in the EU paying interest on deposits (‘paying agents’) either to report the interest paid to taxpayers resident in other EU states or to deduct a withholding tax on the interest paid.
Certain people have found ways around it. One method is to channel the interest paid through intermediate tax-exempted structures. So the authorities want to get tough. But the banks are resisting. While they do not condone tax evasion, they complain that the proposals would be troublesome and expensive to implement.
Who dreamed it up?
The European Commission – specifically László Kovács, commissioner for taxation and customs.
What are the main provisions?
The first involves interest payments made by paying agents to intermediate structures outside the EU. The Commission proposes that paying agents who know that the beneficial owner of the interest is an individual resident in the EU should apply the provisions of the directive as if the payment was directly made to that individual.
The second involves interest payments made to intermediate structures inside the EU, including some non-charitable trusts and foundations. The Commission proposes that those structures should be regarded as “paying agents upon receipt” as soon as they receive the interest, and they must apply the provisions of the directive.
The third involves the use of innovative financial vehicles to generate an income that is similar to, but is not, savings interest. The Commission proposes to extend the directive to cover income from securities which are equivalent to debt claims; and certain life insurance contracts whose performance is strictly linked to income from debt claims.
What’s in the small print?
The Commission proposes to extend the directive to cover income from all investment funds.
What does the industry say?
The European Banking Federation (EBF) prefers the status quo. Roger Kaiser, EBF senior adviser on tax and accounting, says: “If there is a change in the rules, banks will have to update all their systems, which will be extremely burdensome and costly.” It would put EU banks at a competitive disadvantage to banks outside the EU.
The EBF’s main gripe is that the Commission expects banks to use their “know your customer” procedures, developed as a result of anti-money laundering legislation, to determine who the beneficial owners of interest are. To adapt these procedures for another purpose would not be easy. Chris De Noose, managing director of the European Savings Banks Group, is in favour of clamping down on tax evasion but says the priority should be to stamp out “inconsistencies of interpretation or implementation of the Savings Taxation Directive in individual member states” as it stands.
How much will it cost?
No one knows.
What do the law makers say?
“The first report on the operation of the Savings Taxation Directive concluded that the directive, although effective within the limits of its scope, can be easily circumvented,” says Mr Kovács. “The current scope of the directive needs to be extended, in order to meet our goal of stamping out tax evasion, which affects the national budgets and creates disadvantages for the honest citizens.”
The law of unintended consequences
Closing the loopholes will drive money away from EU banks – which is exactly what happened before the directive in its original form came into effect.
Could we live without it?
Yes.
