The EU Savings Tax Directive- One Year On
by
the Lowtax Network Editorial Team, July 2006
IMPORTANT
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Contents:
Introduction
Executive
Summary
Origins
of the Savings Tax Directive (STD)
Impact
of the STD
Table
of Jurisdictions
How
To Escape The STD
FAQ
STD
Glossary
Text
Of The Savings Tax Directive
Disclaimer:
The Lowtax Network has taken reasonable care in assembling
this report but accepts no liability for any actions
taken or not taken as a result. In particular, this
report does not constitute investment advice. Anyone
contemplating an investment, or a change to a current
investment, needs to take appropriate professional advice.
Introduction
It's
now a year since the European Union introduced its Savings
Tax Directive in an attempt to gain control of previously
untaxed income flows, with particular attention being
paid to offshore jurisdictions such as those in the
UK's Channel Islands, the Caribbean, and European countries
such as Luxembourg, Liechtenstein and (especially) Switzerland.
Figures
are not yet available from Brussels for the results
of the Directive, but some individual countries have
released figures showing returns that are perhaps on
the low side, and there is plentiful anecdotal evidence
to suggest that most investors have either fled to jurisdictions
which don't apply the Directive, for instance Hong Kong
or Dubai, or have re-arranged their deposits so as to
avoid the Directive - something that is quite easily
done (see below).
Among
the few jurisdictions to announce figures was Jersey,
whose Comptroller of Income Tax reported in June 2006
that GBP13 million had been collected in withholding
tax revenues from bank deposits in the first six months
of the European Savings Tax Directive.
Under
the terms of the agreements with individual EU member
states, which went into effect on July 1, 2005, 25%
of the amount collected is retained by the collecting
authority. Accordingly the EU Member States receive
some GBP10 million and the Jersey Exchequer receives
some GBP3 million.
According to the Jersey government, this is in line
with initial estimates.
Individuals
who reside in an EU Member State with relevant savings
income arising in Jersey can opt for information on
the savings income received to be exchanged with their
domestic tax authority rather than be liable to the
retention tax. It is estimated that approximately 30%
have chosen this option, but the Jersey authorities
expect this percentage to increase with time. (The retention
tax will eventually increase to 35%).
A
statement by the States of Jersey revealed that both
the Comptroller of Income Tax and the President of the
Jersey Bankers’ Association are satisfied that the process
of exchanging information and the retention of tax has
worked smoothly.
"Both
information and tax have been transferred efficiently
to the Income Tax Department for onward transmission
to the relevant competent authorities in the EU Member
States before the 30 June 2006 as required under the
Agreements," the statement explained.
Commenting,
Senator Frank Walker, Chief Minister, noted that:
“This first payment of retention tax to the EU Member
States is ample evidence, if it is needed, of the good
neighbour policy we follow in our relations with the
EU, a policy that we expect to see reciprocated."
A straightforward calculation shows that, at 15% tax,
with interest rates of 5%, GBP13m would represent underlying
deposits of GBP3.5bn. Since Jersey's assets, including
bank deposits and investment funds, are nearly GBP350bn,
according to a recent announcement by Jersey Finance,
those figures suggest that only a tiny fraction of assets
held on the island are being caught by the Directive.
The
situation in Switzerland appears to be similar. In April,
2006, Roland Reding, a tax expert at accounting firm
KPMG, said that he had seen figures suggesting that
the amount of tax withheld by Swiss banks since the
directive came into force last July is relatively small.
"I
have seen [banking] provisions for this tax and I was
always surprised the figures were so small. The payments
to the EU may be far below expectations," he said.
Estimates
of Switzerland's withholding tax collections vary between
CHF120-200 million ($91-152 million) for the first 12
months of the Directive.
As
previously mentioned, billions of euros in assets have
reportedly flown to parts of the world where the EU
directive cannot reach such as Hong Kong and Singapore,
while in August 2005 alone, shortly after the directive
entered into force, nearly EUR7 billion poured out of
Swiss accounts into Luxembourg Sicav II bonds, which
are outside the scope of the Directive.
Predictably,
but probably vainly, the European Commission is now
seeking to include Asian financial centres within the
ambit of the Directive. However, in October 2006, it
became clear that that
Hong Kong and Singapore will likely refuse to discuss
joining the EU's tax information-sharing scheme, applied
under the Savings Tax Directive.
EU Commissioner for External Relations and European
Neighbourhood Policy, Benita Ferrero-Waldner met with
Prime Minister Lee Hsien Loong and Senior Minister Goh
Chok Tong for discussions on a wide range of bilateral
and regional issues of mutual concern, including strengthening
EU-Singapore political and economic relations through
the negotiation of a Partnership and Co-operation Agreement.
The
Agreement offered the possibility of immediate enhanced
cooperation with the European Community on a wide range
of policy areas including trade and investment, higher
education, science and technology and it would provide
the springboard for a wider Free Trade Agreement. The
EU would also like to include information-sharing in
the Agreement.
However,
Martin Glass, Hong Kong's Deputy Secretary for Financial
Services & the Treasury in Hong Kong told the Society
of Trust and Estate Practitioners' Trusts & 'Tax
in Asia' conference in October that the SAR did not
have the power to share information with other tax authorities.
Said
Mr Glass:
"The
powers of the government and the commissioner of inland
revenue are relatively limited and extend only to information
which is required for our own tax purposes. There might
be huge ramifications that compliance with such a savings
directive would have for our future as an international
financial centre, which is also guaranteed under the
Basic Law."
Executive Summary
The
European Union Savings Tax Directive (STD), which went
into effect on 1st July, 2005, in fact formed merely
one part of a major tax reform package launched by the
European Commission in 1997. As originally drafted,
the STD aimed at a uniform 'information exchange' regime
to apply across the Union, with all countries agreeing
to report interest on savings paid to the citizens of
other Member States to those States' tax authorities.
Because
of resistance from EU Member States with strong traditions
of banking secrecy, the Commission had to allow Austria,
Luxembourg and Belgium, amongst others, to apply a withholding
tax (at 15%) until 2009. Many of the UK's offshore financial
centres have been forced to join the STD, along with
the Netherlands Antilles, Aruba and some European centres
(Andorra, Monaco, Liechtenstein and San Marino). Most
of these places also took the withholding tax route,
as did Switzerland, which was the hardest nut for the
EU to crack.
The
STD applies to many types of return on savings instruments,
all loosely described as interest, when received by
individuals, but does not affect interest paid to companies.
Under the information exchange system, the identity
of recipients will be known to their home tax authorities;
when tax is withheld, the identity of the recipient
will not be reported, thus preserving confidentiality.
The Origins of the
Savings Tax Directive
The
Commission's aforementioned tax package included two
other major elements, the Code of Conduct Committee's
assault on Harmful Tax Practices, and a proposal for
a Council Directive to eliminate withholding taxes on
payments of interest and royalties made between associated
companies of different Member States. The interest and
royalties directive was by far the least contentious
of the three initiatives, and after being held up for
years by the interminable negotiations over the Savings
Tax Directive, it was agreed by the Council and put
into effect in 2003.
This
is not the place to describe the tortuous history of
the Code of Conduct Committee, a kind of 20th Century
version of King Henry VIII's Star Chamber presided over
by the baleful Dawn Primarolo, whose spring-like name
brought only autumnal shadows to the 66 sets of tax
incentives targeted by the Committee.
The
Primarolo Committee, as it became known, found its work
entangled with the twin assaults of the OECD and the
FATF on 'offshore', but was partly successful in smoothing
the fiscal playing field for companies in the EU and
its 'near abroad' of associated tax havens. Many of
the 66 'harmful tax practices' have survived in truncated
form, but many others have been abolished, albeit with
extended 'grandfather' provisions for existing beneficiaries.
The
Original Savings Tax Directive
As
originally drafted, the Savings Tax Directive (STD)
aimed at a uniform 'information exchange' regime to
apply across the Union, with all countries agreeing
to report interest on savings paid to the citizens of
other Member States to those States' tax authorities,
thus removing the possibility for citizens of the Union
to hide the returns on their savings from their home
tax authorities. It's evident that such a proposal runs
headlong into the tradition of banking secrecy which
was well-established in a number of Member States, notably
Austria, Luxembourg and Belgium.
It
was also envisaged from the start that EU Member States
would impose information-sharing regimes on their associated
dependent territories, making up a substantial proportion
of the world's tax havens. Many of these were British,
of course, and two are Dutch, so that from the beginning
the UK's financial sector regarded the STD as a Franco-German
conspiracy against 'les Anglo-Saxons'.
Alongside
the STD, and planned in coordination with it, was the
OECD's 'level playing field' attack on 'unfair tax competition'
which sought to iron out the low tax regimes applying
in offshore financial centres and force the centres
to agree to information-sharing regimes that were equivalent
to the STD.
Opposition
To The STD
Opposition
to the STD focussed initially on the threat to the City
of London's Eurobond business; it was only later that
the offshore dependencies woke up to the threat when
they realised with horror that, far from supporting
them against the dragons of Brussels, the British Government
in general, and Gordon Brown in particular, were going
to cooperate willingly and even enthusiastically with
Brussels in imposing the STD on their fragile economies,
so painfully emancipated (as they would see it) from
dependence on slaves, sugar and bananas.
It is important to realise that the STD represented
just the European dimension of a world-wide assault
by the high-taxing countries of the OECD on the 'leakage'
of tax represented by 'offshore' in its various manifestations.
This grand vision of a world without low taxes (very
Colbertian in its origins) was defeated partly by the
US Republican administration which took power in 2001
and partly by the strenuous efforts of 'offshore' itself,
which perhaps improbably saw an alliance between numerous
island financial centres fighting effectively against
the massed tax inspectors of the OECD.
The
gradual routing of the OECD by 'offshore' in 2001 and
2002 formed the backdrop to the context of the later
stages of the EU's battle to impose the STD in Europe.
Had the OECD been successful in creating a nice, smooth,
global fiscal playing field, there is little chance
that the stand-out EU Member States would have been
able to ally themselves with Switzerland and the US
right wing in their effective rearguard action against
the STD.
The
Feira Summit
Early
negotiations over the STD in 1999 and 2000 saw strong
objections voiced by a number of Member States in defence
of their own interests.
Luxembourg
asked for a 'coexistence' model in which it could apply
a withholding tax to interest payments made to citizens
of EU member states until such time as it chose to switch
to exchange of information (possibly never, given its
atachment to the principle of banking secrecy). Austria
(also with a strict banking secrecy law), Belgium (with
its dentists) and Greece (why?) supported Luxembourg
in wanting to be able to choose between applying the
tax and giving out information on depositors and savers
from other member states. At the other extreme, the
UK continued to demand a compulsory switch from an initial,
optional situation to a uniform regime for exchange
of information within a predetermined period of, say,
ten years. Most other countries took up positions in
between the two extremes, although agreeing that exchange
of information was a better model than actual collection
of the tax.
The
UK, with perhaps a more realistic understanding of the
leakiness of Fortress Europe than continental countries,
was also nearly alone in its continued insistence that
other countries such as Switzerland and the US should
conform to the 'exchange of information' model on the
same time-scale as the EU.
At
that stage of the discussions, there was also no agreement
either on what would happen to any tax collected under
a withholding tax option (not included in the original
Directive), or on the rate of tax to be applied.
The disarray
among Member States was somewhat resolved in June, 2000,
by the EU's finance ministers in Santa Maria da Feira,
Portugal. The proposed information exchange system was
made dependent on financial centres from Switzerland
to the Caribbean accepting similar ('equivalent') measures,
while the renegade states, led by Austria, forced agreement
on a 7-year period (to 2009) during which there would
be an option to apply a withholding tax instead of exchanging
information.
Details
of the Feira compromise were filled in at an
Ecofin Council meeting that November. It remained agreed
that a unanimous vote had to take place by the end of
2002, and that there would then be a seven-year transition
period before a full information-sharing regime is installed
in all member states. All EU countries other than Luxembourg
and Austria agreed to begin to share information as
from 2003, while the two stand-out countries would apply
a withholding tax of 15% (rising in stages to 35%) until
they finally convert to information-exchange by 2009.
Laurent
Fabius, the French finance minister, who was in charge
of the negotiations, said after the meeting that the
directive would go into force regardless of the attitude
of other countries, but had to agree that there needed
to be a vote. He thought however that no country would
dare stand in the way of the directive, saying: 'It
would be difficult to imagine, after the commitments
taken, that some countries and colleagues would say
no and we don't want to go ahead.'
UK
officials emphasized after the meeting that the UK had
obtained a 'grandfather' clause to protect the City's
key eurobond business: the information-sharing rules
would only apply to bonds issued after 1st March 2001
- the French had wanted this date to be 1st January
2001.
STD
Negotiations Foundered In 2001
The apparent agreement reached on the text of an STD
in November, 2000, turned out to be nothing of the kind
as country after country, both inside and outside the
EU, made difficulties during 2001 over the meaning of
'equivalent measures'. These difficulties were exacerbated
when the victory of George Bush in that year's US election
removed the presumption that the US would agree to anything
resembling 'equivalent measures'.
Luxembourg and Austria, in particular, insisted that
if they had to make amendments to their banking secrecy
rules then so should other other tax havens such as
Monaco, Lichtenstein and Switzerland.
'Luxembourg's
position is not open to change and will not change,'
said the principality's Prime Minister Jean-Claude Juncker.
Switzerland
With the US an unknown quantity, attention focussed
on Switzerland, without whose agreement the STD would
be a dead letter. STD negotiations with Switzerland
were intricately tied up with 'Bilaterals II', a second
set of economic agreements (after a first set had been
approved in 2001) which would bring Switzerland closer
to integration with the EU, although still falling short
of full membership. Switzerland resolutely refused to
do more than strengthen its withholding tax system and
agree a beefed-up Mutual Assistance Treaty with the
Union.
The
EU wanted to separate the issues of banking secrecy
and the STD from 'Bilaterals II', while Switzerland
held out for parallel resolution of the two sets of
negotiations. In early 2002 there was a stalemate. 'We
have received encouraging signs from Brussels, but of
course the decision is entirely up to EU ministers,'
said Jose Bessard from the Swiss Integration Office
in June.
(However,
this stalemate was later resolved- see below.)
Luxembourg
As
the 31st December, 2002, deadline approached by which
the European Union was supposed to confirm STD agreement
by Member States and outside countries, it wasn't only
Switzerland that stood in the way. The UK had strong-armed
some of its 'dependent territories' into conditional
agreement with the Directive, including Jersey, Guernsey
and the Isle of Man; but other jurisdictions including
the mighty Cayman Islands said they would fight rather
than give in.
Luxembourg
Prime Minister and Finance Minister Jean-Claude Juncker
said at the time that:
'In
the forthcoming ECOFIN meeting December 3, in Brussels,
Luxembourg will make use of its veto to block the current
proposal of the EU Commission . . . to impose an EU-wide
withholding tax on investments and to abolish banking
secrecy as it still exists in Luxembourg and Austria.
Luxembourg is of the opinion that the agreement reached
between the EU Commission and Switzerland in matters
of EU tax harmonization is not enough for Luxembourg
to abandon its banking secrecy. Mr. Juncker also informed
the press that he refused to attend a scheduled meeting
in Copenhagen last Friday November 29, of the German,
French and UK Ministers of Finance which would have
attempted to put Luxembourg under pressure to accept
Brussels' proposal."
Mr
Juncker made it clear that for Luxembourg, 'equivalent
measures' meant 'identical measures', and that this
had been its position ever since the Directive was first
proposed at the Feira summit in Portugal in 2000. He
said that Luxembourg remained in favour of a 'co-existence'
model for taxation of savings, as had been proposed
prior to the Feira agreement, and that the Commission's
compromise proposal would result in a massive flight
of capital from the EU to surrounding countries. He
suggested that the French and German finance ministers
might then like to explain to their citizens why they
were throwing away much-needed tax revenue just at the
moment when they needed it most.
The
Fudge Is Cooked
During
2003, the tide slowly turned back in the EU's favour,
largely because of 'Bilaterals II', which were obviously
going to stand or fall with Switzerland's participation
in the Savings Tax Directive. Eventually they stood,
after tense and often bad-tempered negotiations which
lasted into early 2004, accompanied by a Greek chorus
made up of errant EU Member States headed by Luxembourg,
with a Liechtenstein obbligato.
Switzerland
won the negotiations in the sense that the EU had to
allow it to adopt a withholding tax, and banking secrecy
as such seemingly remained undented. But as Frits Bolkestein
declared menacingly in 2004: "We had to start somewhere."
Finally
the STD was agreed in a monumental fudge in February,
2003 which agreed a 'variable geometry' solution to
the impasse, posited on the application of 'equivalent'
measures in EU Member States' dependent territories,
although neither Switzerland nor the US were explicitly
required to apply them. Some EU member states were still
to be allowed to impose a withholding tax on savings
returns while the majority of countries apply an information-sharing
regime.
In
March, then Taxation Commissioner Frits Bolkestein reported
to the Council on the discussions that had taken place
with Switzerland, Liechtenstein, Monaco, Andorra and
San Marino since the Council meeting on 18th February.
But in the same month, the
Caymanian authorities launched legal proceedings in
the EU's Court of First Instance in order to challenge
the European Union's decision not to allow a consultation
process over the STD. Cayman's David and Goliath act
didn't last long, however, and in December Dawn Primarolo
delivered an official ultimatum, warning the jurisdiction's
government once again that if it failed to implement
the European Union's Savings Tax Directive voluntarily,
the United Kingdom would legislate on its behalf.
By
March, 2004, the UK was able to tell the Ecofin Council
that all of its dependent territories had agreed to
comply by the rules of the STD. But Frits Bolkestein
had to admit to the Council that there had been an unacceptable
level of progress made in the EU’s negotiations with
Andorra, Monaco, Luxembourg and Liechtenstein. By May,
however, Bolkestein reported that even the more strident
Member States, France, the Netherlands and Austria were
able to give their approval to a compromise deal worked
out between the EU, Switzerland and Luxembourg allowing
these countries to adopt the directive whilst retaining
a degree of banking secrecy.
The compromise ensured that Switzerland would provide
legal assistance under the terms of the Schengen agreement
in cases relating to indirect taxes such as customs,
VAT, and alcohol and tobacco levies, but would be exempted
from providing such assistance in cases involving direct
taxation. Luxembourg, which had voiced concerns that
a separate deal with the Swiss would harm its own banking
industry, was assured that it would not be required
to make any sacrifices in terms of banking secrecy which
Switzerland and other countries were not also prepared
to make.
The Race To The Finish
In
June, 2004, it was announced that the Council of Finance
Ministers had reached a unanimous agreements on “all
matters of substance” with dependent and associated
territories and certain other third countries in respect
of the Savings Tax Directive.
“I
am very pleased to report that the Commission was able
to inform the Council today that not only Switzerland,
but 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 as
regards the taxation of income from savings,” announced
Bolkestein.
He continued:
“In
particular, they have all agreed to impose a withholding
tax on the interest income of EU residents at the same
rate as Austria, Belgium and Luxembourg and to hand
over 75 per cent of these revenues to the Member State
of the EU resident concerned. They have also agreed
to exchange information on request in criminal or civil
cases of tax fraud or similar misbehaviour.”
There
were problems over timing, however, and the EU was obliged
to delay STD implementation by six months to 1st July,
2005. The
Swiss warned the European Commission that even the new
July 1 deadline could only be met "in the absence of
a referendum”. Under Swiss law, voters have 100 days
after a law is published to collect sufficient signatures
in a petition to challenge the legislation.
The
key elements of the agreement with Switzerland also
constituted the basis for agreements with other third
countries, namely, Andorra, Liechtenstein, Monaco and
San Marino. The Commission also confirmed that “all
matters of substance” with the dependent and associated
territories of the Netherlands and the United Kingdom
had been resolved, and model agreements had been drafted
to allow for bilateral savings tax agreements between
member states and each of these territories.
In
November, 2004, the Swiss government indicated that
a referendum on the Savings Tax Agreement was unlikely,
and that the legislative process needed to approve the
adoption of the Directive and the Bilaterals II agreements
was proceeding smoothly. In
comments made after a regular meeting of finance ministers
from countries in the European Free Trade Area, Dutch
Finance Minister Gerrit Zalm revealed: “The Swiss minister
made us happy by informing us that everything was well
underway with the savings (tax) agreement.”
In
December, 2004, the Swiss parliament approved a plan
to distribute some of the proceeds from the EU Savings
Tax to the cantons, in a move which cleared the path
towards a final ratification of the Swiss-EU agreement
on the STD.
The
agreement means that three quarters of the revenues
raised as a result of the savings tax directive will
flow back to EU countries, with the remaining quarter
distributed to the Swiss state and Swiss cantons.
So
the deed is done, and the EU Savings Tax Directive came
into force in all member states, and all those offshore
jurisdictions beholden in one way or another to the
member states, on 1st July, 2005. Only Bermuda, through
an accident of geography, seems to have been left out.
However,
in August 2005, it emerged that 18 funds had departed
Bermuda as a result of the negative impact of the European
Savings Directive.
While Bermuda
is not directly affected by the Directive, funds domiciled
in Bermuda can be adversely impacted if they have 'paying
agents' located in EU member states or third party countries
(such as Switzerland) that have signed up to the legislation.
“It
was really a question of the goalposts moving against
us in a way the industry never ever foresaw and therefore
it did not prepare,” Bermuda Monetary Authority
chairman Cheryl-Ann Lister was reported as noting at
the time.
BACK
TO TOP
 Impact
of the Savings Tax Directive
As
can be seen from the above example of Bermuda, there
are considerable technical and administrative implications
of the Savings Tax Directive (STD) for the financial
services industries and the tax departments of all those
countries that are caught in the STD's net (and some
that are not); but here we are concerned just with the
impact of the STD on investors and savers, so we will
be describing technical and administrative changes only
in so far as they impact on the relationship between
relationship between financial services agencies and
their clients.
More
than 30 countries and jurisdictions are affected by
the STD; they are listed in a Table
in the next section, with basic information about the
regime which each territory is adopting. Here we will
focus on the types of financial product and the types
of income that will be affected by the STD, and on the
mechanics of information-exchange and of withholding.
Who
Is Affected?
The
Directive does not apply to persons (including EU Nationals)
who are resident outside the 25 Member States of the
EU or the Crown Dependencies of the UK (Jersey, Guernsey
and the Isle of Man). Any new countries joining the
EU will be obliged to accept the information-sharing
variant of the Directive, and their residents will be
caught by the STD as and when those countries accede
to the EU.
If
you are an individual (natural person) who is resident
in an EU Member State, and earn bank interest or other
savings income (as defined below)
on deposits or investments held in your own name in
another EU Member State, third country or territory
included in the Table below, then it is likely that
you will be affected by the STD.
NB:
Alone among non-EU countries and territories, the jurisdictions
of Jersey, Guernsey and the Isle of Man have reciprocal
STD agreements with the Member States of the EU. This
means that a resident of any of these three territories
who receives savings income in a Member State of the
EU will be subject to the STD, through information-sharing
or withholding tax as appropriate.
Definition
Of Savings Income
There
are four main categories of savings income under the
scheme:
-
Interest paid out on debt-claims or credited to accounts;
-
Interest rolled-up and paid out when a debt-claim
is repaid or sold;
- Distributions
made by certain unit trusts and other collective investment
funds which have invested more than 15% of their investments
in debt-claims;
- Accumulated
income paid out when units in certain collective investment
funds that have invested more than 40% of their investments
in debt-claims are redeemed or sold.
In
simpler language, savings income is therefore essentially
interest earned on bank deposits, interest from, and
proceeds on the sale or redemption of, certain bonds
and income from certain types of investment funds (principally
open-ended money market retail funds).
Most
other types of income (for example, dividends on ordinary
or preference shares of companies, salary and pension
payments) fall outside the definition and are therefore
outside the scope of the STD. Some specific types of
payment which do not qualify are as follows:
- Payments
under contracts for differences;
- Manufactured
payments arising during stock loans or under sale
and repurchase agreements (including where the underlying
security is a money debt);
-
Debts which do not arise from a transaction for the
lending of money (for instance where there is a late
payment and compensation interest is paid);
-
'Grandfathered bonds'. Certain negotiable debt securities
are not treated as money debts if they meet certain
conditions for the duration of a transitional period
which will end no later than 31 December 2010. These
securities (“grandfathered bonds”) do
not then count as money debts for all purposes of
the regulations: interest, premiums and discounts
derived from these bonds are not savings income; and
investment in these bonds does not count when deciding
whether the thresholds which determine whether income
from certain collective investment funds is savings
income have been passed. A security is a grandfathered
bond if it was first issued before 1 March 2001 or
the prospectus was first approved by the appropriate
regulatory authority before that date, and no further
issue was made on or after 1 March 2002. If the bond
is a government bond (or issued by a related public
authority or an international organisation and a further
issue is made on or after 1 March 2002, the whole
of the issue (whether made before, on or after 1 March
2002) is not a grandfathered bond. The whole issue
of the bond is a money debt. If the bond is issued
by another type of issuer (e.g. a commercial company)
and a further issue is made on or after 1 March 2002,
only the part of the issue made on or after 1 March
2002 is not a grandfathered bond. This part of the
bond issue is treated as a money debt; the rest of
the issue (made before 1 March 2002) is not a money
debt.
-
Distributions and other payments derived from funds
which are not UCITS or elective UCITS are not reportable
as savings income under the regulations. A UCITS is
an ‘undertaking for collective investment in
transferable securities’ authorised in accordance
with the UCITS Directive. Non-EU funds may or may
not be UCITS depending in a complex way on their nature.
Even when a fund is a UCITS, its distributions are
only taxable under the STD when the 15% threshold
for income from money debts is breached. The rules
are complex.
Definition
Of 'Paying Agent'
The STD states that ‘paying agent’ means
any economic operator who pays interest to or secures
the payment of interest for the immediate benefit of
the beneficial owner. The ‘operator’ can
either be the debtor of the debt claim or can be the
operator charged by the debtor or the beneficial owner
with paying or securing the interest.
The paying agent is always ‘the last link in the
payment chain’ before the relevant payee or residual
entity and is the person that actively initiates a payment
directly to a relevant payee or residual entity, or
to his or its instructions. However, banks, other financial
institutions or other businesses which have a role in
the payment process are not regarded as making a payment
if their role is essentially passive (they act on instructions
from others) or auxiliary (they merely provide services
to help the paying agent). A bank or similar institution
does not therefore make a payment merely by issuing
or sending a cheque, or arranging for the electronic
transfer of funds on behalf of one of its customers.
A
financial institution which has outsourced many of its
administrative or back-office functions to an independent
contractor remains responsible for the transaction and
is therefore a paying agent. However, registrars or
other third parties involved with making payments of
interest on bonds or from funds are likely to be paying
agents because they have a direct relationship with
the beneficiary. Likewise, trust companies, stockbrokers
or other professionals may be paying agents. The situation
can be complicated where trusts or their equivalent
(eg foundations) are involved.
The
Two STD Regimes
With
minor variations, countries or territories applying
the STD use one of two regimes, an 'information-sharing'
regime or a 'withholding tax' regime. The Table in the
next section specifies which regime is in force for
each country or territory.
In
the case of some countries applying the withholding
tax regime, the client has a choice to accept information-sharing
instead of being taxed. However, this choice is more
apparent than real in most cases, since it depends on
the willingness of a financial institution to enable
the choice, and many banks or funds may not wish to
take on the extra administrative work that is necessary
to implement information-sharing.
Information-Sharing
You
are paid the interest on your savings gross, ie without
deduction of tax, but the bank or other financial institution
which you patronise (known as a 'paying agent') will
be required to provide details of your tax residence.
You
may be asked for your Tax Identification Number (TIN).
This is your tax registration number in your country
of residence. The STD requires banks and other paying
agents to obtain customers’ TINs where possible. Whatever
information the banks have, they will pass on to the
tax authorities in your country of residence, along
with information about the income you have received
(as defined above).
The
minimum amount of information that 'paying agents' (banks
and other financial institutions - see definition above)
are required to pass on to the 'competent authorities'
of member states consists of: identity and residence
of the beneficial owner; name and address of the paying
agent; account number of the beneficial owner; and interest
payment data including the amount of interest income
earned, plus information regarding any proceeds from
sale, redemption or refunds.
If
someone claims to be resident in a country different
to that on his or her passport or I.D. card, the rules
stipulate that "residence shall be established
by means of a tax residence certificate issued by the
competent authority of the third country in which the
individual claims to be resident."
Some
countries or territories have issued sets of regulations
to their financial institutions which may define the
extent of the information you are required to give.
In the absence of this local legislation, there there
is no obligation placed on banks or other paying agents
to request the TIN; agents are permitted to rely on
passports or identity cards, or other documentary proof
of identity that is in their possession.
Withholding
Tax
Under the withholding tax option, banks and other paying
agents automatically deduct tax from interest and other
savings income earned and pass it to their local tax
authority, indicating how much of the total amount relates
to customers in each Member State.The local tax authority
then keeps 25% of the total amount collected and remits
75% to the various tax authorities within the Member
States.
The
receiving country gets a bulk payment which is not broken
down in terms of the individuals who are covered.
The
rate of withholding tax are 15% from July 2005, 20%
from 1st July 2008, and 35% from July 2011.
However,
those EU Member States which are initially permitted
to apply a withholding tax (Austria, Luxembourg and
Belgium) will be obliged to switch to the information-sharing
regime by 2009. Only third countries (eg Switzerland)
and (perhaps) some dependent territories will be able
to continue to apply the withholding tax option after
that date.
NB:
In some countries, notably Jersey, Guernsey and the
Isle of Man, the withholding tax is called a 'retention
tax'. But it's exactly the same animal.
In
the Member States which will apply a withholding tax,
the STD specifies that they also need to provide one
or both of the following procedures in order to ensure
that a relevant payee may request that no tax be withheld:
- a
procedure which allows the relevant payee expressly
to authorise a paying agent to report information
to his Member State of residence; and/or
- a
procedure which ensures that withholding tax is not
levied where a relevant payee presents to his paying
agent a certificate drawn in the name of a competent
authority of his Member State of residence.
The
second of these procedures applies also to all those
third countries and territories which are implementing
a withholding tax. As explained above, the first procedure
is effectively voluntary in the case of non-EU Member
States.
The
Effect Of The STD On Offshore
Now
to the $64,000 (EUR64,000?) question: What impact has
the directive had on the flow of capital and investments
into the offshore jurisdictions hit by the new rules?
Opinion from industry participants and observers alike
appears to be generally negative.
According
to a survey of the 500 senior finance professionals
from the Isle of Man, Jersey and Guernsey, conducted
by IoM-based firm Acuity in 2004, more than 50% of those
polled believed that the directive was "bad news",
although some 30% felt that the planned withholding
tax would not have a negative impact on the jurisdictions.
The survey results also revealed that 70% of those polled
believed that the three islands had been wise to opt
for a withholding tax, rather than for automatic exchange
of information.
The
results of this survey suggested that the industry is
certainly uncomfortable with the information exchange
aspect of the legislation, and many observers, particularly
those opposed to global tax enforcement initiatives,
believed that the effect of measures like the EU directive
has resulted in capital flowing to jurisdictions where
interest reporting is not an issue. However, the Caribbean
offshore jurisdictions appear to have survived the litany
of new regulations thrown at them by the likes of the
OECD and FATF over the last decade, and only time will
tell what impact the EU directive will have on offshore
business.
Early
indications are that the Directive is a paper tiger.
Whereas many commentators expected capital to fly out
of such jurisdictions as Jersey, and the Isle of Man,
totals for bank deposits and investment funds in these
places have continued to rise, indeed they have been
rising even faster than before, although it is hard
to disentangle the effects of the Directive from those
of a boom period in many stock markets. Even if the
European offshore centres are thriving, places like
Dubai, Hong Kong are Singapore are doing even better.
BACK
TO TOP
Table of Jurisdictions
Country/Jurisdiction |
Status
vis-a-vis EU |
Regime
to be applied |
Comments |
Andorra |
Independent |
Withholding
Tax |
Under
the joint control of France and Spain |
Anguilla |
UK
Dependent Territory |
Information
Exchange |
|
Aruba |
Dutch
Dependent Territory |
Information
Exchange |
|
Austria |
Member
State |
Withholding
Tax (15%) |
Information
Exchange by 2009 |
Bahamas |
Independent |
|
Not
covered by STD |
Belgium |
Member
State |
Withholding
Tax (15%) |
Information
Exchange by 2009 |
Bermuda |
UK
Dependent Territory |
Outside
STD regime |
Missed
out by EU by accident |
British
Virgin Islands |
UK
Dependent Territory |
Withholding
Tax (15%) |
|
Cayman
Islands |
UK
Dependent Territory |
Information
Exchange |
|
Cyprus |
Member
State |
Information
Exchange |
|
Czech
Republic |
Member
State |
Information
Exchange |
|
Denmark |
Member
State |
Information
Exchange |
|
Estonia |
Member
State |
Information
Exchange |
|
Finland |
Member
State |
Information
Exchange |
|
France |
Member
State |
Information
Exchange |
|
Germany |
Member
State |
Information
Exchange |
|
Gibraltar |
UK
Crown Colony |
Information
Exchange |
|
Greece |
Member
State |
Information
Exchange |
|
Guernsey |
UK
Crown Dependency |
Withholding
Tax (15%) |
Known
as a 'Retention Tax'; the client can choose information
exchange as an option. |
Hungary |
Member
State |
Information
Exchange |
|
Ireland |
Member
State |
Information
Exchange |
|
Isle
of Man |
UK
Crown Dependency |
Withholding
Tax (15%) |
Known
as a 'Retention Tax'; the client can choose information
exchange as an option. |
Italy |
Member
State |
Information
Exchange |
|
Jersey |
UK
Crown Dependency |
Withholding
Tax (15%) |
Known
as a 'Retention Tax'; the client can choose information
exchange as an option. |
Latvia |
Member
State |
Information
Exchange |
|
Liechtenstein |
Independent
but follows Switzerland |
Withholding
Tax (15%) |
|
Lithuania |
Member
State |
Information
Exchange |
|
Luxembourg |
Member
State |
Withholding
Tax (15%) |
Information
Exchange by 2009 |
Madeira |
Part
of Portugal |
Information
Exchange |
|
Malta |
| | 
