The
European Savings
Tax Directive (ESTD)
Introduction to the Savings
Tax Directive
Directive 2003/48/EC on the taxation of savings income in
the form of interest payments (the '2003 Directive') was adopted
on 3 June 2003.
Its ultimate aim is to
enable
savings income in the form of interest payments made in one Member
State to beneficial owners who are individuals resident for tax
purposes in another Member State to be made subject to effective
taxation in their State of residence.
The initially foreseen date of application (1 January
2005) was postponed until 1 July 2005.
At that date
Andorra, Liechtenstein,
Monaco, San Marino and Switzerland started to apply
equivalent measures to those of the 2003 Directive under
Agreements signed between each one of these jurisdictions and the
Community; at the same time all the relevant dependent or
associated territories of the
Netherlands
and the UK (ten in all) started to apply the same measures
as those of the 2003 Directive, under agreements signed by each of
them with each of the Member States at the time.
The Directive on taxation of savings income in the form of
interest payments formed one element of the
"Tax Package" aimed at tackling harmful tax competition in the
Community.
Under the terms of the Directive:
All Member States are ultimately expected to
automatically exchange information on
interest payments by paying agents established in their
territories to individuals resident in other Member States.
All Member States, except Belgium, Luxembourg and Austria,
immediately introduce such a system of information reporting.
Belgium, Luxembourg and Austria
introduce a system of information reporting at the end of a
transitional period, during which they levy a withholding tax at a
rate of 15% for the first three years, 20% for the following three
years, and 35% thereafter.
They transfer 75% of the revenue of this withholding tax
to the investor's state of residence. These three Member States are entitled to receive
information from the other Member States.
The withholding tax levied by Belgium, Luxembourg and
Austria during the transitional period is entirely creditable or
refundable in the investor's state of tax residence.
The investor has an option to provide for preliminary
information of his or her Member State of residence for tax
purposes about the savings held abroad, or to permit the
disclosure of the income to the same State, as an alternative to
the retention or withholding tax.
The
transitional period ends:
- If and when the EC enters into an agreement,
following a unanimous decision of the Council, with Switzerland,
Liechtenstein, San Marino, Monaco and Andorra to exchange
information upon request as defined in the OECD Model Agreement on
Exchange of Information on Tax Matters released on 18 April 2002
in relation to interest payments, and these countries continue to
apply simultaneously the withholding tax levied by them since 1
July 2005 on the basis of the already existing agreements with the
EU in this field (see below), and
- If and when the Council agrees by unanimity
that the United States is committed to exchange of information
upon request as defined in the 2002 OECD Model Agreement with all
EU Member States in relation to interest payments.
Belgium,
Luxembourg or Austria may elect to introduce automatic exchange of
information during the transitional period, in which case they no
longer apply the withholding tax and the revenue sharing.
The Directive has a relatively broad scope that covers
interest from debt-claims of every kind whether obtained directly
or as a result of indirect investment via most collective
investment undertakings and other similar entities.
Agreements between the EU and five European
countries
On 2 June 2004, the Council adopted a
Decision on the signature and conclusion of an Agreement between
the EC and Switzerland providing for measures equivalent to those
laid down in the Directive. The Agreement was signed on 26 October 2004.
The following key elements of this Agreement also form the
basis for agreements with Andorra,
Liechtenstein, Monaco and San Marino:
- A retention or withholding tax with revenue
sharing at the same rates as applied by Belgium, Luxembourg or
Austria during the transitional period of the Directive;
- An option for the taxpayer to permit the
disclosure of the income to his or her Member State of residence
for tax purposes as an alternative to the retention or withholding
tax;
- A provision for the exchange of information on
request in cases of tax fraud or similar misbehaviour;
- A review clause to allow the Contracting
Parties to review its working over time in line with international
developments.
These agreements have all been signed
(IP/04/1445 ) and concluded and are
effectively applied since 1 July 2005.
THE TEXT OF THE EUROPEAN SAVINGS TAX DIRECTIVE (ESTD)
Tax Competition
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
The competitors
A. 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 G-20
-
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 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
The European Union, on 3rd June 2003, adopted
Directive 2003/48/EC on the Taxation of Savings Income in the form of
interest paymentsThis is an interesting approach to extra-territorial
taxation
The winners are very clever nations, so they give
"options" to their enemies, and a sense of "choice"
B. Tax efficient jurisdictions. Also
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 have
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.
The European Commission
on 13 November 2008 adopted an
amending
proposal to the Savings Taxation Directive, with a view to
closing existing loopholes and better preventing tax evasion.
The Commission proposal
seeks to improve the Directive, so as
to better ensure the taxation of interest payments which are
channelled through intermediate tax-exempted structures.
It is also proposed to
extend the scope of the Directive to income
equivalent to interest obtained through investments in some
innovative financial products as well as in certain life insurance
products.
What are the changes proposed?
First, the Commission proposes to
improve the Directive so as to better ensure taxation of interest
payments which are channelled through intermediate tax-exempted
structures.
For interest
payments made by paying agents established in the EU to certain
intermediate structures established outside the EU, the Commission
proposes that those paying agents subject to anti-money laundering
obligations are required to use the information already available
to them within this framework to establish the actual beneficial
owner of these payments.
When the latter is an
individual resident in another EU Member State, the paying agent
would consider the payment concerned as directly made to this
individual.
For interest
payments made to certain untaxed intermediate structures
established within the EU, including some non-charitable trusts
and foundations, those structures will be always obliged to apply
the provisions of the Directive (exchange of information or
withholding tax) upon receipt of any interest payment from any
upstream economic operator wherever established.
Second, the Commission proposes to
extend the scope of the Directive to income obtained from
investments in some innovative financial products with capital
protection (less than 5% risk coverage) and in certain life
insurance products.
Third, the
proposal brings a major reduction of administrative burden for
individuals who opt for exchange of information in Austria,
Belgium or Luxembourg where they receive interest payments and
therefore claim exemption from withholding tax.
The proposal asks
that the paying agent will directly report information to the tax
authorities, at the request of the individual who authorize it, in
place of levying the withholding tax.
Fourth, the Commission proposes to
ensure a level playing field between all investment funds or
schemes, independently of their legal form.
Fifth, it proposes technical
improvements which are beneficial for the activity of paying
agents, such as a clearer treatment of investment funds
established in a country different from the one of the paying
agent and a clearer guidance for Member States in order to avoid
possible cases of duplication of paying agent responsibilities.
The
European Savings
Tax Directive (ESTD)
Council Directive
2003/48/EC of 3 June 2003 on taxation of savings income in the
form of interest payments (the ‘EUSD’)
has
been applied in the EU Member States (MS) since 1 July 2005.
The ultimate aim of the
EUSD, as agreed at the Santa Maria de Feira European Council of 19
and 20 June 2000 and at the ECOFIN Council meeting of 26 and 27
November 2000, is to enable savings income
in the form of interest payments made in one MS to beneficial
owners who are individuals resident for tax purposes in another MS
to be made subject to effective taxation in accordance with the
laws of their State of residence.
However, when the
EUSD became applicable in 2005, it was apparent that
further refinements were advisable to take
account of developments in savings products and in investor
behaviour. Domestic tax systems
have also shifted towards treating income from some types of
innovative financial products as equivalent to interest from debt
claims.
To take account of
developments such as these, the EUSD provides that the Commission
shall report to the Council every three years on its operation
and, where appropriate, propose any amendments necessary in the
light of these reports to ensure effective taxation of savings
income and to remove undesirable distortions of competition.
Against this
background, the Commission presented a first
report to the Council on 15 September 2008
(COM (2008)552
final, Council Document 13124/08 FISC 117) on the application of
the EUSD following its first three years of operation.
The report drew on
consultations held with the EU Member States’ tax administrations,
data provided by them on the first two tax years of application
and the findings of an expert group set up by the Commission in
2007 to seek advice from business sectors concerned or likely to
be concerned by the EUSD.
As explained in the
report, the EUSD has proven effective within
the limits set by its scope. It has also had
indirect, non-measurable, positive results in
enhancing taxpayers’ compliance.
However, the review
process has demonstrated that the current coverage of the EUSD
does not fully match the general ambitions
expressed in the Council conclusions of 26 and 27 November 2000.
In particular, the
report drew attention to the need for amendments in relation to
the definitions of beneficial owner and paying agent, the
treatment of financial instruments equivalent to those already
explicitly covered, and some procedural aspects.
On the basis of the
report, the Commission proposes to amend the
EUSD, taking into account the administrative burden
involved and the opinions expressed by the tax administrations of
the MS and the expert group, in accordance with the principles of
subsidiarity and proportionality as set out in Article 5 of the
Treaty.
The
most important proposed amendments
refer to the definition of savings income,
to accommodate developments in savings products in recent years.
The proposed amendments
are intended to cover not only savings
income in the form of interest payments, but other, substantially
equivalent, income from some innovative financial products and
from certain life insurance products that are comparable to debt
claim products.
If more comprehensive
solutions ensuring exchange of information
between the tax administrations of EU MS on the full range of life
insurance contracts were to be implemented, the need to cover
benefits from these life insurance products under the EUSD could
possibly be reconsidered.
It is also proposed
to extend the scope of the Directive to cover, under certain
conditions, interest payments obtained by some entities and
legal arrangements for the ultimate benefit
of individual beneficial owners.
Significant refinements
are also proposed to the definition of the ‘paying agent upon
receipt of an interest payment’, in order to improve the
effectiveness of this mechanism and the legal certainty for market
operators.
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