The FBE strongly recommends that the commencement date should be deferred until 1 January 2005, pointing out that the recommendation that the Directive be implemented on 1 January 2004 was originally made in 2001 at a time when agreement on a final text was expected by end of 2002, at the very latest. The deadline was missed, and the Council does not expect to adopt the Directive until March 2003 or perhaps even later.

The FBE says it is conscious of the further official steps that still need to be taken before the Directive is adopted and implemented. Switzerland, Liechtenstein, Monaco, Andorra and San Marino need to approve the EU proposals, and the terms must then be translated into formal bilateral conventions. Switzerland might, in particular, have to organize a referendum.

The FBE also notes that, even within the EU, there are still some reservations: the Austrian Government has stated that the implementation of the proposed measures might require the modification of the Austrian Constitution. Moreover, it is arguable that the European Parliament and the European Economic and Social Committee need to be consulted, according to Article 94 of the Treaty, given that the Council has materially amended the text initially presented by the Commission.

Furthermore, when the Directive has been adopted it will need to be transposed into national law in all Member States. The details and complexities involved in both the information exchange system and the withholding tax system should not be under-estimated, says the FBE. Member States will also need further time to adopt supplementary regulations and guidance. Many Member States are unlikely to pass the necessary laws and ancillary regulations before the end of 2003. This is particularly the case in those Member States where scheduled political elections risk slowing down the legislative process.

On a technical level, says the FBE, the transposition may be particularly problematic in some countries that will have to apply a withholding tax system that fundamentally differs from the classical deductions of tax at source. Paying agents and competent authorities in the EU and in Switzerland will need considerable time (at least 12 months) to be ready to develop, test and implement IT systems and procedures. To illustrate further, the systems of many banks that currently categorize their clients only according to whether they are resident or non-resident, will have to be adapted so as to record the country of residence of their clients. Once systems have been developed and tested, banks will have to organize intensive staff training programmes to ensure correct implementation of the new procedures. This process will be very costly and time-consuming, at a time when banks have to adapt their systems to new banking supervision standards (Basel II) and
International Accounting Standards.

A further complication is that fundamental changes to systems will be necessary to reflect the fact that the Directive goes beyond actual payments of interest. The Directive covers sales and redemption of bonds and other fixed-rate instruments and will embrace income from many collective investment vehicles. Information will need to be collected that is not currently reported by banks and in most countries this will require radical changes to the processing systems for securities transactions.

Member banks of the FBE are convinced that banks and tax administrations will not be ready to apply the new regulations on 1 January 2004. This may raise the question of the liability of banks for any non-compliance. The problem will be particularly sensitive in the context of the withholding tax. Whereas it may be possible for information to be gathered retrospectively (on interest payments made on or after the date of implementation of the Directive), it is not possible to deduct tax from a payment that has already been made. The FBE says it does not believe that it is sensible for banks to have to rely on a soft implementation policy (i.e. a period when tax officials accept a reasonable degree of non-compliance if a bank has shown that it has made reasonable efforts to meet its initial obligations).

For all these practical reasons the FBE strongly recommends that ECOFIN should defer implementation of the Directive until 1 January 2005.