Guernsey To Adopt Withholding Tax Under EU Directive

by Jason Gorringe, Tax-News.com, London

07 April 2003

Guernsey's Advisory and Finance Committee said at the end of last week that after undertaking a wide ranging consultation with all sectors of the finance industry on the options contained within the EU Draft Directive on Taxation of Savings, it had concluded that if and when the EU Tax Package is finally adopted it will recommend to the States to introduce a retention tax on EU resident individuals' savings interest.

Laurie Morgan, President of the Advisory and Finance Committee said:

'Following extensive discussions with the finance industry, the Advisory and Finance Committee has concluded that if, and when, the EU Tax Package is adopted, it will recommend to the States legislation to introduce a retention tax on EU resident individuals' savings interest. This decision reflects the clear preference of the overwhelming majority of our finance industry.

'The Committee believes that a retention tax on EU resident individuals' savings interest is in the best long term interests of the Island. The Committee's decision ends uncertainty for our industry and sends out a very strong message to the international community, demonstrating that Guernsey responds positively to emerging standards while maintaining its independence and competitiveness in the international marketplace.

'It is important to recognise that the retention tax option gives each individual investor the choice to opt out of the retention tax by authorising disclosure of information to their home authority. Our industry needs to be able to offer their customers this choice in order to level the playing field with competitor jurisdictions.

'As a responsible member of the international community, the Committee believes that the Island should respond constructively to the EU Tax Package. However, it is only once the EU Tax Package as a whole has been adopted that the Committee will bring forward proposals for the necessary legislation for consideration by the States. This of course includes final adoption of the Draft Conclusions of the 19 March ECOFIN Council which recognise our timetable for implementation of our corporate taxation strategy by 2008 and state that our intended measures are not harmful under the terms of the Code of Conduct.

'If the EU Tax Package as a whole is adopted, Guernsey will introduce the retention tax at the same time that Member States apply the Directive on Taxation of Savings and equivalent measures apply in the named Third Countries including Switzerland and the dependent territories of Member States. This is a very important level playing field principle and means that the earliest a retention tax on EU resident individuals' savings interest will be introduced in Guernsey is 1 January 2005.

'The proposed retention tax will only affect EU resident individuals' savings interest. It does not impact upon companies or most trusts, and it does not affect non-EU business. In fact, a recent survey of deposit takers on the Island, demonstrated that about 90% of deposits in Guernsey were outside the direct scope of the Draft Directive.'

EU Finance Ministers had agreed a final text for the Directive on Taxation of Savings subject to unrelated Italian reservations. The retention tax option, outlined in the Draft Directive has formed the basis of discussions with five of the six named Third Countries - Switzerland, Andorra, Liechtenstein, Monaco and San Marino. (The US is already judged to have applied equivalent measures). The Draft Directive sets out the following rates for the retention tax, assuming that it applies from 1 January 2005:

1 January 2005 - 31 December 2007 - 15%

1 January 2008 - 31 December 2010 - 20%

1 January 2011 - 35%

The retention tax in Guernsey will also be set at the above rates, said the Committee. Guernsey will retain 25% of the retention tax revenue and transfer 75% of the revenue to the EU Member State of residence of the beneficial owner of the interest.

It had been supposed that the UK government would insist that its dependant territories, including Guernsey, would apply the information sharing option under the Savings Tax Directive, but unofficial comments on Friday suggested that Guernsey had been allowed a free choice by HMG.

Last week also saw the Cayman Islands in action at the European Court of Justice, where its application for interim measures on the subject of the Savings Tax Directive was denied; however, the Court said that the Directive as drafted did not require the UK's dependant territories to apply 'equivalent measures'. This was a matter between the UK and the individual territories, said the Court.

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