Individual savings are soon to be taxed without mercy and there will be no escaping it, says Susana Fernández Caro.
Benjamin Franklin famously stated that, in this world, nothing is certain but death and taxes. The European Commission is ensuring that the latter is true for the savings income of individuals.
The tax savings directive, which comes into force on July 1, applies to cross-border interest payments between the member states of the EU, dependent territories – the Cayman Islands and the Isle of Man among others – and so-called ‘third countries’ like Switzerland, Liechtenstein or Monaco.
According to the new legislation, a paying agent – for example, a bank – will report payments of individual investors to his local tax authority. That tax authority will then pass the information on to the individual’s country of residence. In some jurisdictions, due to bank secrecy guarantees, there will be a withholding tax instead of information reporting for a transitional period, but investors will have the option to choose reporting.
Banks now face the task of identifying interest payments to clients, reporting them and/or performing the retention. National governments have to publish guidelines detailing the process of implementation, which might differ quite significantly between countries, but are essential in order for banks to comply with the directive.
Time out
The European banking and investment management industries fear that the July 1 deadline might not be met. In a recent letter to the Ecofin, the European Banking Federation (FBE) and the European Fund and Asset Management Association (EFAMA) express “deep concerns” about the “urgent need for clarity and certainty” on the implementation process of the directive.
The FBE and the EFAMA warn that “at this very late stage, most member states have been unable to provide appropriate guidance”, which they should have done by January 1, 2005, according to the new law. Banks and fund managers mention “serious doubts” about being able to deliver IT systems to process the information and state that “in some countries there is likely to be a low quality level of implementation because of the lack of guidance and lack of certainty”.
In Switzerland, the main ‘third country’, the government has already published a second draft of the guidelines, which seems to have facilitated the task for the banks. Neither UBS nor Credit Suisse share the FBE’s concerns and both say that they will be ready for July 1. A UBS spokesperson says: “We expect that there will be slight differences in each country’s interpretation of the directive.”
Fritz Müller, head of taxes at the Credit Suisse Group, pins the cost of the implementation at several million Swiss francs and says that the firm’s clients have been informed about the option between retention and the exchange of information, which allows for Swiss banking secrecy to be preserved.
No flight of capital is expected. “Given that a variety of products unaffected by the retention are available for clients, we do not expect major negative effects in private banking,” adds Mr Müller.
Defined targets
In the directive, the term “interest” encompasses income from bank accounts, corporate and government bonds, debentures and other similar securities. Interest payments earned on certain bonds issued before March 2001 are excluded until December 31, 2010. Insurance and pension products are expressly excluded from the directive. Capital gains are not included in the legislation either.
Lynne Ed, financial services tax partner at Ernst & Young, says: “I do not expect to see private clients deserting their banks in droves. There is an increasing number of products that fall out of the scope of the directive. Also, clients who are concerned may choose to rearrange their affairs, without leaving their bank altogether.”
Ms Ed points out that banks will bear “high compliance costs in terms of meeting the directive, not in terms of losing clients. Banks will have to collect new data from clients and on products and be able to report it”.
The directive will be reviewed in 2007 and new products might be included then, in order to raise more taxes. Governments hoped that
significant amounts of money that were in offshore accounts would surface, but this is unlikely to happen. Instead, “in 2007, we will see another move to tighten up the rules to raise extra revenue”, adds Ms Ed. It appears that the European Commission is searching for certainty the Benjamin Franklin way.
