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EU Snubbed Over Savings Tax Directive

by Mary Swire, for, Hong Kong

16 October 2006

It is likely that Hong Kong and Singapore will refuse to discuss joining the EU's tax information-sharing scheme, applied under the Savings Tax Directive.

Faced with paltry returns during the first year of operation of the Directive, the European Commission recently said that it wanted to extend the Directive to major Asian banking entrepots. But according to the Financial Times, Singapore told EU Commissioner for External Relations and European Neighbourhood Policy, Benita Ferrero-Waldner, who visited the country on 10th October, that extension of the Savings Tax Directive is simply not on the agenda.

The Commissioner met with Prime Minister Lee Hsien Loong and Senior Minister Goh Chok Tong for discussions on a wide range of bilateral and regional issues of mutual concern, including strengthening EU-Singapore political and economic relations through the negotiation of a Partnership and Co-operation Agreement. The Agreement offers the possibility of immediate enhanced cooperation with the European Community on a wide range of policy areas including trade and investment, higher education, science and technology and it will provide the springboard for a wider Free Trade Agreement. The EU would like to include information-sharing in the Agreement.

Meanwhile, Martin Glass, Hong Kong's Deputy Secretary for Financial Services & the Treasury in Hong Kong told the Society of Trust and Estate Practitioners' Trusts & 'Tax in Asia' conference last week that the SAR did not have the power to share information with other tax authorities.

Said Mr Glass: "The powers of the government and the commissioner of inland revenue are relatively limited and extend only to information which is required for our own tax purposes. There might be huge ramifications that compliance with such a savings directive would have for our future as an international financial centre, which is also guaranteed under the Basic Law.'

The Savings Tax Directive, which extends to a number of 'third countries' such as Switzerland, the Channel Islands and Caribbean offshore territories, was introduced in July 2005. It facilitates the exchange of information between EU tax authorities on certain types of savings and investments held by EU residents in their territory so that interest earned can be taxed in the resident investor's home state.

The legislation also allows some jurisdictions to apply a withholding tax, currently 15%, instead of exchanging information. However, these jurisdictions have reported relatively paltry withholding tax revenues, prompting the EU to take action to plug the directive's many loopholes.

In the first six months of the operation of the legislation, 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. In the same period, Luxembourg collected EUR48 million, Jersey EUR13 million, Belgium EUR9.7 million, Guernsey EUR4.5 million, Liechtenstein EUR2.5 million and Ireland EUR400,000.

Although there are several ways for investors to escape the directive, such as switching assets to vehicles not covered by the legislation, perhaps the most obvious avoidance strategy is for investors to simply shift their money to more tax-friendly jurisdictions; anecdotal evidence suggests that Dubai, Hong Kong and Singapore have been major beneficiaries.

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