EU Cuts Information-Sharing Deal But Puts Off Implementation

Jeremy Hetherington-Gore, Tax-news.com, London

21 June 2000

After a marathon 3-day negotiation in Portugal, EU leaders finally reached agreement on the outlines of a deal on the 'savings tax' directive, or, if you want to take a sceptical view, they cooked up a piece of fudge which gives the illusion of a deal, but actually lets everyone off the hook in one way or another.

The deal is much as reported yesterday - a 7-year period during which countries can choose between a withholding tax or information exchange, a preliminary period until the end of 2002 to bring outside countries on board, and an opt-out for Austria if it is unable to gather the 75% vote needed to change its constitution to abolish banking secrecy.

The Swiss Bankers Association immediately said that banking secrecy wasn't up for discussion; also yesterday, perhaps not by coincidence, Jersey and the Isle of Man both said that they had no intention of giving in to the OECD's bullying over inclusion on its infamous blacklist, due out next week. All three jurisdictions would be high on the list of countries which would have to agree to information-sharing before the EU deal could come into effect in 2003.

Gordon Brown, Britain's Chancellor, is being portrayed as the man who has single-handedly brought off the deal, battling for two years against the sometimes furious resistance of many of the EU's member states, before they came around to his way of thinking.

The Commission now has until the end of the year to come up with a Directive which would establish the mechanics of information-sharing. Presumably anyone opening a bank account or making an investment in the EU will either have to give their home country taxpayer number, or will have to say (prove?) that they are not tax-resident in the EU. Then the bank or fund concerned will simply report interest payments to the appropriate tax authority. Simply? Don't forget that by the time the seven years is up, there may be 28 member states, and Europe will be close to stretching from the Atlantic to the Urals.

28 member states means that an investment fund in Warsaw (for instance) will be sending information to the tax authorities of 27 other countries. Will it use Polish, or the language of the home country concerned? If the information consists just of the taxpayer number and the amount of money paid, it's not such a problem, but if the name and address of the taxpayer is included (too much danger of mistakes otherwise), it becomes more interesting.

Now, let's consider. You are a French citizen, and you have been used to keeping your savings in the form of gold, which you ship across the Swiss border in time-honoured fashion at the weekend. But the Swiss (improbably) have given in to Gordon Brown and the OECD (to which they belong) and have voted against banking secrecy in a referendum (long odds against that). So you decide to open a bank account instead. Where? Not in the EU, you can be sure. Perhaps in Liechtenstein, on the Internet? Perhaps in Andorra while you are having a skiing break? Maybe it's safer to get right away from Europe - how about Mauritius - no, they've written one of those letters to the OECD - I know, Vanuatu, they speak French there don't they?

What if you are an investment fund manager? Your next fund is going to be marketed exclusively on the Internet (this is 2006) and will be listed in the Bahamas, which has a very high level of supervision, well up to international standards. Where will you manage it? Not in the EU, of course, because the administrative overhead has become horrendous under the information-sharing directive. Well, perhaps the Bahamas - it's expensive, and the travelling is tedious since you live in Surrey, but it would make sense to be near the listing. Perhaps it's time to move there. The children can go to boarding school, after all.

It's clear that if information-sharing is going to work, then it has to be applied nearly universally. The more jurisdictions that take part in it, the better-off will be those that don't. If the OECD really does apply sanctions to the hold-out jurisdictions on its black-list, there may be a polarisation of jurisdictions into a 'conforming' group and a 'renegade' group.

Can the OECD apply sanctions? This means, cutting off a jurisdiction by compelling banks not to deal with it, what Andrew Crockett (Chairman of the G7's Financial Stability Forum) dreams about doing after lunch on Sunday afternoons. But is this legal? What about the rights of depositors in such a jurisdiction? They're not all Russian mafioso or Colombian bandits. What about the damage to shareholders in the sanctioned banks?

It's fun to speculate. Will there be universal conformity one day? Or will the Internet undermine the tax-collecting powers of the state to the point that countries have to compete fiscally for the favours of well-off individuals?

More particularly, does Gordon Brown truly believe in what he is doing, in which case he may perish in a Quixotic attack on human nature; or is he cunning beyond compare, calculating that there is exactly zero chance of the US agreeing to enforce an EU information-sharing directive against its own banks, thus preserving the status quo for London's eurobond issuers and the UK's offshore dependencies?

What do you think? Let us know - post your comments to our InvestorsOffshore Discussion Forum topic Is Gordon Brown Genuine?

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