EU Looks To Tighten Savings Tax Directive

by Ulrika Lomas, Tax-News.com, Brussels

24 September 2008

Urged by Germany to conduct a review of the European Savings Tax Directive, the European Commission has announced its intention to tighten the rules of the legislation and consequently close existing loopholes and prevent tax evasion.

Germany is leading the onslaught to review the directive as it witnesses its German investors avoiding tax by pouring millions of euros into investment vehicles which fall outside the scope of the rules, particularly in neighbouring Liechtenstein and Switzerland.

EU Tax Commissioner Laszlo Kovacs is due to issue a formal proposal by November outlining the amendments. However, as in all EU tax matters, in order to ensure that the proposal is adopted, the unanimous backing of all 27 member states is required.

The savings tax directive entered into force in 2005. Under the legislation, some EU member states and certain ‘third countries’ (e.g. Switzerland, Liechtenstein and the UK offshore territories) offer savers the choice between having their details handed over to the tax authority in their home countries or paying a withholding tax instead (currently 20%), three-quarters of which is remitted to the country in question.

However, reports have suggested that the revenues raised from withholding taxes so far have fallen well below EU expectations. This is because the directive as it stands is fairly easy for investors to circumvent, either by channelling assets into business entities which are not covered by the rules, such as a company or partnership, or by parking savings in jurisdictions not included in the directive, like Dubai or Hong Kong.

By further amending the rules and extending the scope of the savings directive, the EU hopes to receive a far greater share of the tax revenues it believes are due from savers and investors. But the EU’s attempts to expand the geographical reach of the directive are likely to prove very difficult, with the governments of Hong Kong and Singapore already having voiced their opposition to such a proposal.

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