European Parliament Discusses Savings Tax Directive

by Ulrika Lomas, Tax-News.com, Brussels

27 January 2009

The European Parliament Economic and Monetary Affairs Committee is currently considering a draft report that proposes further measures to tighten up the European Union Savings Tax Directive.

The report, whose Rapporteur is Benoit Hamon, a member of the Party of European Socialists from France, makes proposals for some significant changes to plans already outlined by the European Commission.

The report proposes to end the transitional period with a finite date, rather than by reference to the behaviour of third countries. Under this proposal, the transition period would end three years from the levying of the withholding tax at a rate of 35%, i.e. in 2014.

The Rapporteur proposes to replace the definitions proposed by the Commission, which typically name a country and then set out the type of entity and legal arrangements which would be brought within the Directive, with a list of legal structures and then a list of the countries concerned.

"This could very dramatically expand the number of legal entities caught by the Directive," observed Graham Mather President of the European Policy Forum. He continued:

"In Switzerland’s case, for example, the Commission proposal mentioned two categories of legal entity, the Trust and the Foundation. Under the new proposal this would be replaced by a list of twenty-four bodies ranging from limited liability companies through international banks, insurance and reinsurance companies, joint-ventures, settlements, funds of all forms etc etc."

"The Parliament Rapporteur says that the legal entities can be brought back out of the Directive if the country of jurisdiction makes an application to the Commission to have them removed on the grounds that they could not have their place of effective management located in the jurisdiction concerned or on the ground that 'appropriate taxation of interest income paid to these legal persons or arrangements is in fact ensured.'"

"The Rapporteur says his proposal is designed to reduce the possible loopholes in the Directive but what it would do if carried into law would be to expand the scope of the Directive enormously and create a massive traffic of applications by third countries to seek exemption from the Commission."

"Other changes would expand the categories of paying agents caught by the Directive and provide for its review from time to time to focus in particular on “the appropriateness of extending the scope to all sources of financial income, including dividends and capital gains, as well as to payments made to all legal persons. This, the Rapporteur says, is in order to 'deal with any potential large scale circumvention of the Directive in the future.'"

However Mather points out that the amendments proposed in this draft report have to pass several hurdles. First, they will have to go through the Economic and Monetary Affairs Committee itself and a plenary vote in the Parliament. However, Mather says that it is too early to anticipate the Committee’s likely response and the amendments to the draft report which can be tabled by members of the Committee.

Secondly, the amendments will have to go through negotiation with the Commission, which will be aware that a number of member states especially Austria, Belgium and Luxembourg will be uncomfortable with the dramatic expansion proposed at this stage.

The final decision will be made by the Council of Ministers.

"If one were forced to attempt a prediction at today’s date it would be that the European Parliament will pass something broadly along these lines; that the Commission will be uneasy about these but not in a strong position to resist against Franco-German support for them; and that the outcome in the Council will depend to a significant degree on the degree of opposition mobilised in Austria, Belgium and Luxembourg and by third countries," concludes Mather.

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