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Luxembourg Defends Savings Tax Opposition

by Ulrika Lomas,, Brussels

21 May 2012

During the recent European Union (EU) Economic and Financial Affairs Council (Ecofin) meeting in Brussels, Luxembourg’s Finance Minister Luc Frieden defended his decision to block the European Commission’s plans to negotiate new and stronger savings tax agreements with third countries, insisting that given recent developments, the automatic exchange of tax information is not necessarily the only solution to combating tax evasion.

Lamenting the lack of debate and spirit of openness, Luxembourg’s Finance Minister said that he had sought to initiate a discussion in Brussels with his European counterparts and with the European Commission on international developments that had taken place since the adoption of the Savings Tax Directive in 2003.

During the course of his intervention, Frieden highlighted the fact that at the time, the automatic exchange of tax information was considered to be the only means with which to combat tax evasion. Since then, other developments have shown the efficiency of the withholding tax system.

Alluding to the fact that Luxembourg has been “regularly stigmatized” for blocking the Commission’s plans, thereby preventing the introduction of an automatic exchange of information in the EU, Frieden underscored the complexity of the debate, which, he argued, could not simply be reduced to “for or against” banking secrecy, as the Commission has suggested.

While emphasizing that Luxembourg is indeed also committed to combating tax evasion, the minister nevertheless insisted that efforts to guarantee the protection of client banking information should no longer be considered synonymous with non-transparency within the framework of international co-operation.

Pointing out that a number of European countries currently apply a system based on withholding tax, Frieden confirmed that such a system is also applied in Luxembourg, both at national and at European level. Luxembourg’s system is based on a double mechanism, the finance minister added, notably on an exchange of information on demand and a withholding tax at source, guaranteeing effective taxation, the transfer of tax due by non-residents to their country of origin, and the transfer of information upon request, in clearly defined cases.

The recent conclusion of bilateral withholding tax accords between Switzerland and Germany, the UK and Austria, introduces a new element, Frieden continued, namely the recognition by the UK and Germany, two countries in Europe, of the withholding tax principle applied in a third country.

Concluding his remarks, and underscoring his willingness to find a compromise, Luxembourg’s finance minister said that the ongoing debate, which has so far failed to reach an acceptable solution, should now focus on the efficiency of both models in combating tax evasion.

Frieden proposed limiting the mandate to merely extending the field of application of the Savings Tax Directive, to increase the efficiency of the current system.

Much to the deep annoyance and extreme frustration of European Union Tax Commissioner Algirdas Semeta, both Luxembourg and Austria blocked the European Commission’s plans aimed at strengthening cooperation in tax matters.

The European Commission had sought a negotiating mandate from EU finance ministers to strengthen common instruments against tax evasion by concluding a treaty with third countries, including Switzerland, Monaco, Liechtenstein, Andorra and San Marino, providing for application of the EU Savings Tax Directive in these jurisdictions.

In application since 2005, the EU Savings Tax Directive regulates the automatic exchange of information on the savings income of European Union citizens, and is considered to be a key instrument in the fight against tax evasion. Given that the Directive contained a number of ‘loopholes’, the European Commission presented a revised version last year.

Yet Luxembourg and Austria rejected the Commission’s latest plans. Austria’s Finance Minister Maria Fekter challenged the European Commission’s motives, insisting that it is merely endeavouring to abolish banking secrecy and to ensure an automatic exchange of data, rather than to include third states.

TAGS: tax | European Commission | banking | Liechtenstein | Luxembourg | Monaco | offshore | agreements | offshore banking | banking secrecy | withholding tax | Austria | Germany | Switzerland | European Union (EU) | Andorra | San Marino | Europe

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