The European Commission (EC) announced on Thursday that it has adopted an amending
proposal to the savings tax directive that will widen the scope of the
legislation "with a view to closing existing loopholes and eliminating
tax evasion."
Effective since 2005, the savings tax directive seeks to ensure that paying agents
either report interest income received by taxpayers resident in other EU member states or levy a withholding tax on the interest income received. The Commission
proposal seeks to tighten the directive, so member states can tax more interest
payments channelled through intermediate tax-exempted structures.
The EC proposes to extend the scope of the directive to forms of income obtained
through investments in some "innovative financial products" as well
as investments in certain life insurances products. It also proposed to simplify
the technical operation of the directive to make it more "user friendly
and efficient."
Laszlo Kovacs, Commissioner for Taxation and Customs, said: "The first
report on the operation of the savings tax directive concluded that the
directive, although effective within the limits of its scope, can be easily
circumvented. The current scope of the directive needs to be extended, in order
to meet our goal of stamping out tax evasion, which affects the national budgets
and creates disadvantages for the honest citizens."
At present, it is relatively easy for individuals to circumvent the rules of
the savings directive by using interposed legal persons or arrangements, such
as foundations or trusts, which are not taxed on their income – something that
the Commission has long acknowledged.
With regard to interest payments made by paying agents (banks, financial institutions,
independent professionals, etc.) established in the EU to certain intermediate
structures established outside the EU, the Commission proposes that paying agents
in the EU apply the provisions of the directive (exchange of information or
withholding tax) at the time of the payment to the intermediate structure, as
if this payment was directly made to the individual.
Concerning payments of interest to certain intermediate structures established
within the EU, including some non-charitable trusts and foundations, those structures
will be always obliged to act as a “paying agent upon receipt” under
the proposed new regime. This means that the provisions of the directive must
be applied by these structures upon receipt of any interest payment, no matter
where they are established and regardless of the actual distribution of any
sums to the individual beneficial owners. The suggested definition of "paying
agent upon receipt" includes all entities and legal arrangements (trusts,
foundations etc) which are not taxed on their income under the general rules
for direct taxation in their Member State of residence or establishment.
The savings tax directive can also be circumvented by using financial
vehicles other than a classical savings account in a bank. To combat this, the
Commission proposes extending the scope of the directive to income from securities
which are equivalent to debt claims and life insurance contracts whose performance
is strictly linked to income from debt claims.
In addition, the Commission proposal seeks to ensure a level playing field
between all investment funds or schemes independently of their legal form. This
means that income obtained from those investment funds by individuals resident
in the EU will be subject to effective taxation.
The savings tax directive has applied in 42 jurisdictions since July 1, 2005.
These include 27 member states, 5 non-EU 'third countries' (Switzerland, Liechtenstein,
Monaco, Andorra and San Marino) and 10 dependent and associated non-EU territories
(Anguilla, Aruba, the British Virgin Islands, the Cayman Islands, Guernsey,
the Isle of Man, Jersey, Montserrat, the Netherlands Antilles and the
Turks and Caicos Islands).
Following the request of the Ecofin Council, the European Commission started
discussions with selected Asian financial centres earlier this year regarding
the application of the directive, namely Hong Kong, Singapore and Macao. Formal
negotiations are also expected to take place with Norway, at its request, whilst
other jurisdictions like Bermuda and Iceland have shown interest in participating
in the savings taxation arrangements.
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