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European Savings Tax Directive (ESD)
 
The problem
 
Tax competition becomes more important in a global economy, because it is increasingly easy for taxpayers to shift their productive activities to lower tax environments.
 
"Just as banks, pet stores, and car companies treat customers better when they know there is a competitor down the block, governments treat taxpayers better when they know economic activity can cross national borders"
           Wolf, Martin, "Wooing the global taxpayer," Financial Times, July 19, 2000, p. 11
 
But, many governments do not like it. It is simple to understand why.
 
The competitors
1. Higher-tax nations    
There is a simple target for this team: How can we stop taxpayers from fleeing to lower tax environments?
 
Higher tax nations will definitely win. It is obvious.
 
Almost all the good players are with them:
  • The United Nations (UN)
  • The Organization for Economic Cooperation and Development (OECD)
  • The European Union (EU)
  • The Financial Action Task Force (FATF)
  • The Financial Stability Forum (FSF) created by the G–7 nations
  • The Bank of International Settlements and the Basel ii framework (surprise, surprise)
  • Several other multinational organizations are helping this effort, "the OECD effort"
The European Union, on 3rd June 2003, adopted Directive 2003/48/EC on the Taxation of Savings Income in the form of interest payments
 
This is an interesting approach to extra-territorial taxation
 
The winners are very clever nations, so they give "options" to their competitors, and a sense of "choice"

The options:

1. The "automatic exchange of information" option

Exchange of information about EU tax resident individuals who earn savings income in one EU Member State but reside in another

2. The "withholding tax" option
Tax will be deducted at source
from income paid to individuals on certain types of savings where the individual is resident in another EU Member State
 
 
2. The so-called "tax havens" or offshore financial centers (OFCs)       
These jurisdictions account for 1.2 percent of the world's population, but have 26 percent of the world's assets. They offer financial privacy, limited regulation, low or no taxes, and mechanisms providing anonymity for the beneficial owners (who are mainly US or EU citizens).
 
Major OFCs such as the Cayman Islands, Bermuda, and the Bahamas do not have personal or corporate income taxes.
 
Some of these jurisdictions are highly attractive to very rich people and legal entities.
Unfortunately they are also attractive for criminals for a variety of reasons including money-laundering and financial fraud.
 
Unfortunately, Enron used Special Purpose Vehicles (SPVs) in OFCs. Terrorists did the same. BCCI was another example. There was no supervision on a consolidated basis for BCCI. It was by design so. And it was too bad.
 
Some of the offshore banks have a very bad reputation. According to the U.N. “an offshore institution is any bank anywhere in the world that accepts deposits and/or manages assets denominated in foreign currency on behalf of persons legally domiciled elsewhere”
According to the United Nations, about $8 trillion is invested in offshore companies and accounts.
 
Although not in the EU, many offshore financial centers have voluntarily agreed to apply the same or equivalent measures to those in the ESD.
 
 
These offshore financial centers include:
  • The UK Crown Dependencies (the Channel Islands and the Isle of Man)
  • The UK Overseas Territories (Anguilla, Montserrat, British Virgin Islands, Turks and Caicos Islands, and Cayman Islands)
  • The Dependent Territories of the Netherlands (Netherlands Antilles and Aruba)
  • Other countries’ (Switzerland, Andorra, Liechtenstein, Monaco and San Marino) have also voluntarily agreed to apply the same or equivalent measures to those contained in the European Savings Tax Directive.
Is it an indirect consequence, or revenge?
The European Union is not only creating troubles for the UK Crown Dependencies and Overseas Territories, but is also helping their competitors, like Singapore, Hong Kong and OFCs outside of the influence of the European Union. These jurisdictions are definitely benefiting from the introduction of the EU Savings Tax Directive.
 
What is next?
The OFCs lost some battles but all is not lost.
 
These jurisdictions have stated that they will implement the provisions of the European Savings Tax Directive provided that the level playing field exists and continues to exist at all times.
 
They will suspend the bilateral agreements should any of the countries cease to apply the same or equivalent measures.
 
Why do I believe that we will have some surprises there?
 
 
Note
 
This web site has been prepared as a general guide and does not constitute or offer legal, financial or other advice upon which you may act or rely. Specific professional advice should be taken in respect of any individual matter.
 
I do not take the part of support the first or the second group of nations. In fact, I can understand both sides. There are good and bad points in both sides.
 
I do understand the UN, OECD and G-7 fears and I do know that some jurisdictions were (and some still are) a paradise for criminals of all kinds, and tax evasion paradises.
 
On the other hand, I know that many offshore financial centers are very different today. For example, during the weeks I led classes in the Cayman islands, I met many persons that are simply superb - excellent characters and the best professionals you can find - and banks that are really excellent.
 
It is not fair to call every OFC a tax heaven. It is not fair to hear (in conferences for example) that "they must return to the banana republic status". I become very angry when I hear things like that.
 
My opinion: At the end of the day, we must not have winners and losers.
 
George Lekatis
General Manager and Chief Compliance Consultant
Compliance LLC
 

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