In the first independent study to be undertaken on the practical operation of the EU Savings Tax Directive, the Forum shows that the Directive has not fulfilled its original goals. Member state governments have found the exchange of information model difficult to apply with a number of countries reporting long delays, inaccurate data and a range of problems centering on pursuing reports of interest income received by taxpayers in other countries.

By late 2008, six member states had yet to provide the European Commission with data for 2006 and the information reported was subject to wide ranging corrections, as in the case of tax revenue reported by Denmark. In addition, smaller European economies like Estonia have to follow complex procedures for information exchange even though they apply no domestic tax whatsoever on interest income for their own citizens.

The 12 smaller EU states which produced figures for 2006 on the sums which they had reported under the information exchange system of the Savings Tax (Czech Republic, Denmark, Estonia, Finland, Greece, Lithuania, Latvia, Malta, Poland, Portugal, Slovenia and Slovakia) reported between them only EUR90.43m – a combined total amounting to less than 1% of the amount reported by the largest financial centre, the United Kingdom, which reported EUR9132.49m.

In contrast, the alternative withholding tax model, operated by Austria, Belgium, Luxembourg and Switzerland, has proved an efficient and relatively speedy method of recording and raising tax income for EU citizens’ home countries (Switzerland, for example, has already published full and detailed figures for 2007, showing a substantial increase in tax remitted to EU member states).

Compliance costs

The exchange of information model has also proved to be expensive, both in terms of banks’ compliance costs and the resources and time devoted to implementing the EU Tax Savings Directive by member states’ tax authorities.

Based on its extensive survey of banks of different sizes across Europe, the Forum has been able to estimate the compliance costs incurred by the paying agents covered by the Directive. The Forum calculates that the 1,243 leading banks in the EU and Switzerland have incurred compliance costs of EUR753m to implement the current Savings Tax Directive. In addition, they face annual compliance costs of a further EUR693m. And, if the European Commission’s current review of the Directive leads to the scope of the tax being extended, we are likely to see Europe’s financially vulnerable banking sector presented with an estimated bill of an additional EUR682m to comply with the Directive’s wider remit.

Given the relatively modest amounts raised by the Directive to date and the fragile status of many banks across the EU, many of which are now reliant on taxpayer support, this would appear to be a misguided policy initiative. Indeed, there is a real danger that an extended Directive will simply add to banks’ cost base for little net benefit. In the meantime, banks may have to withdraw credit facilities to hard pressed businesses and households in order to meet the higher compliance costs imposed by the Commission.

Extension

Another key feature contained in the Forum’s report is the concern demonstrated by market participants with regard to an extension of the Directive’s scope. Such a move would make it problematic, time-consuming and costly for paying agents to be certain about whether income received from a particular financial product falls within the Directive’s catchment area or not. Such definitional difficulties make it impractical to design straightforward information technology systems and significantly increase annual compliance costs.

Many market participants would prefer the Directive to be left as it is for a further period so that the myriad practical problems associated with the application of the reporting regime can be addressed. Paying agents also express fears that the heightened and well-publicised activity by fiscal authorities in the EU is already triggering investors to move to Singapore, Hong Kong, Dubai and other jurisdictions beyond the reach of the Directive. Accordingly, if there is to be any extension of the Directive they look for simplicity and certainty in its adoption.

The study’s examination of the way revenue authorities exchange information with one another about interest income received by domestic taxpayers from abroad has revealed five major problems, namely:

• Seriously affected by quality of data received;
• Subject to lengthy delays;
• Frequently requiring manual follow-up and further inquiries by tax authorities;
• Prone to confusion on what is taxable of the sum reported, which may be interest or dividend payments, sales proceeds or even a bank withdrawal;
• Disproportionate for smaller countries with no major financial centres.

It is striking to note that the French and German revenue authorities failed to answer the Forum’s research survey despite repeated requests. Both countries have been at the forefront of calls for an extension of the scope of the EU Savings Tax Directive. Italy and Spain were two other countries that did not complete the Forum’s questionnaire. In contrast, full and detailed responses were received from smaller EU member states including Denmark, Estonia and Slovakia.

The Forum’s study indicates that a withholding tax system can be a far more effective means of raising tax revenue because the deduction of real cash and its transfer to the revenue authorities of another member state is a straightforward task when compared to the exchange of a large numbers of data files that may well take years to process by the relevant revenue authority. The Forum’s survey suggests that much of the information received automatically from other authorities in the past has been largely ignored. Lack of transparency by revenue authorities who claim that such information is confidential makes it still more difficult to be confident that the information exchange system is working well.