Earlier this month it was reported that European Union Commissioner for Taxation, Laszlo Kovacs, is seeking to extend the Directive to Hong Kong, Singapore, Japan, Macao, Bahrain, Dubai, Canada and the Bahamas.

The move comes amid growing evidence that European investors have easily outwitted EU tax collectors by shifting their assets to locations not covered by the directive.

The legislation, which extends to a number of 'third countries' such as Switzerland, the Channel Islands and Caribbean offshore territories, was introduced in July 2005. It facilitates the exchange of information between EU tax authorities on certain types of savings and investments held by EU residents in their territory so that interest earned can be taxed in the resident investor's home state.

The legislation also allows some jurisdictions to apply a withholding tax, currently 15%, instead of exchanging information. However, these jurisdictions have reported relatively paltry withholding tax revenues, prompting the EU to take action to plug the directive's many loopholes.

In the first six months of the operation of the legislation, Swiss institutions withheld and passed on to the tax authority about EUR100 million (US$128 million) from the savings of individuals resident in EU member states. In the same period, Luxembourg collected EUR48 million, Jersey EUR13 million, Belgium EUR9.7 million, Guernsey EUR4.5 million, Liechtenstein EUR2.5 million and Ireland EUR400,000.

Although there are several ways for investors to escape the directive, such as switching assets to vehicles not covered by the legislation, perhaps the most obvious avoidance strategy is for investors to simply shift their money to more tax-friendly jurisdictions; anecdotal evidence suggests that Dubai, Hong Kong and Singapore have been major beneficiaries.

Sir Ronald says that the Bahamas is named because, apart from Cayman and the BVI, which are already captured in the EUSD, it has the most financial institutions in the region. He recalls the campaign waged by the OECD against Caribbean jurisdictions prior to the introduction of the Directive, saying that its 'naming and shaming' campaign did great harm to several Caribbean countries which lost both earnings and employment as many financial institutions closed their doors. Indeed, Sir Ronald himself played a prominent part in the defence mounted, more or less successfully, against the OECD's campaign.

Now he says: 'Caribbean countries should be alert to the need to guard their financial services sector against further unnecessary erosion at a time when many of their economies are reeling from the loss of preferential access to the EU market for their exports such as bananas and sugar.'