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EU Tax Men Chase Investors To Asia

by Ulrika Lomas,, Brussels

05 September 2006

European Union Commissioner for Taxation, Laszlo Kovacs, is reportedly seeking to bring Asian financial centres within the ambit of the European Savings Tax Directive.

According to a report in the Financial Times, Kovacs yesterday asked EU tax specialists how the scope of the directive can be extended to include investments held by EU residents in the Asian financial centres, including Hong Kong and Singapore, and possibly Macao.

Kovacs is also seeking the backing of European finance ministers, who met yesterday, for talks with Asian governments later this year concerning the extension of the directive.

The move comes amid growing evidence that European investors have easily outwitted EU tax collectors by shifting their assets to locations not covered by the directive.

The legislation, 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.

Asian governments have been playing down the extent to which their private banking and asset management industries have benefited from the outflow of money from Europe and will likely oppose requests to exchange information with the EU. However, the FT reports that the EU might attempt to impose the directive on a substantial bloc of Asia as part of a proposed trade agreement with ASEAN, whose membership includes Singapore, but not Hong Kong.

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