Swiss Figures Expose Flaws In EU Savings Tax Directive

by Ulrika Lomas, Tax-News.com, Brussels

07 July 2006

Evidence, if any more was needed, that investors have easily outwitted European tax collectors by placing their assets out of reach of the EU Savings Tax Directive has been further borne out this week after Switzerland revealed withholding tax revenues that were far below expectations.

In the first six months of the operation of the legislation, which came into effect on July 1, 2005, Swiss institutions withheld and passed on to the tax authority about EUR100 million (US$128 million) from the savings of individuals resident in EU member states.

On the surface it seems implausible that Switzerland, the world's largest private banking centre with more than 500 major banking institutions and home to an estimated 35% of the world's private wealth, could collect such a relatively small amount; but given the relative ease with which the directive can be circumvented, the figures are not really surprising.

The most obvious route is for investors to place their assets in jurisdictions not covered by the directive; anecdotal evidence suggests that Dubai, Hong Kong and Singapore have been major beneficiaries. However, there are a number of investment instruments that have, for whatever reason, not been included within the scope of the directive.

Other major banking centres have also reported lowly withholding tax revenues: Luxembourg EUR48 million, Jersey EUR13 million, Belgium EUR9.7 million, Guernsey EUR4.5 million and Liechtenstein EUR2.5 million.

The system of tax retention applies to all interest payments covered by the agreement, made by a paying agent on Swiss territory to an individual resident for tax purposes in an EU member state. Initially the rate is set at 15%, rising to 35% from 2011. Three-quarters of the revenues from this system of tax retention go to the beneficiary member states, the remainder goes to Switzerland and the cantons.

In the case of Switzerland, the largest portion of the withholding tax revenues were remitted to the Italian and German tax authorities.

According to a Financial Times report, European Commissioner for Taxation, Laszlo Kovacs, has ordered a review of the operation of the directive with a view to clearer definition of investment funds and clarifying the treatment of interest payments made to trusts.

“The Commission is aware of causes for concern relating to the interpretation of the directive," a spokeswoman for the Tax Commissioner was quoted as stating by the FT.

However, Dieter Leutwyler of Switzerland's federal finance ministry has reportedly pointed out that consultations with the EU over "substantive changes" to the directive could only happen after July 2011 or when both sides agreed to such talks.

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