No Progress On Savings Tax Directive
Monday, January 25, 2010

The EU's Ecofin Council (the bloc's decision body for financial regulation) met this week under the Chairmanship of Ms Elena Salgado, Second Vice-President of the Spanish Government, and unsurprisingly failed to make any progress on revisions to the Savings Tax Directive.

The proposals, which have been becalmed now for a year, have been bundled up with two other initiatives, the anti-fraud agreement with Liechtenstein, and an extension of automatic exchange of information in cases of alleged tax fraud.

'The Presidency intends to have an informal exchange of views intended to prepare the way for an agreement on a set of items that are important for ensuring that Member States can fight tax fraud more efficiently,' it said in advance, and that is all it got, judging from the totally bland and uninformative communique issued after the meeting.

After the European Commission set out its wish-list for a new, improved (worsened, in other words) Savings Tax Directive in November, 2008, which included such impossibilities as the inclusion of Hong Kong and the USA, the European Parliament thought hard and produced a largely compliant - but extremely complex - opinion in April, 2009. In June, the EU Council issued an anodyne statement which appeared to welcome the Parliament's agreement to its plans. Since then there has been silence from Brussels.

The Commission's key proposals were already difficult enough:

• A change in the definition of a Paying Agent to include foreign branches of banks who have headquarters within jurisdictions covered by the Directive, eg the Singapore branch of a UK bank.
• A change in the definition of beneficial owner to catch private companies if their ultimate owners are individuals resident in the EU, and the settlors of many types of discretionary trust if they are EU-resident.
• Inclusion of individuals who receive income through partnerships. All types of partnership will be covered - the partners will be treated as the owners.
• The definition of interest (returns on savings) to be broadened to include non-UCITS funds, unregulated funds, derivatives comprising or based on interest e.g. structured products, baskets, certificates and interest swaps.
• The inclusion of insurance companies as paying agents, and application of the Directive to interest received whether or not it is paid out to policy-holders.

For its part, the Parliament piled Pelion on Ossa by significantly toughening up the Commission's already near-impossible demands, and most contentiously of all by including a 2014 termination date for those countries which still apply a withholding tax.

It is a certainty that countries such as Switzerland and Liechtenstein will resist many of these proposals to the death, and it will be many a long year before any change takes place to the Directive, except of course that the rate of withholding tax will rise to a swingeing 35% in 2011 under the existing rules.