TaxAdministrationEU tax directive sparks war of words

EU tax directive sparks war of words

You would think that something as snappily titled as the European savings tax directive would not really cause any argument.

But that is exactly what this little-known policy has been doing. It has provoked a myriad of arguments between friendly European nations; led many in the US to hold the agreement up as further proof that there is an ever-growing chasm between the way Washington and Brussels operate.

And it has even prompted some living in British dependencies that run offshore financial centres to question its ties with London and call out for independence.

Not bad for a piece of arcane legislation which – and this is its greatest trick – is not even law yet and may never become so.

And the reason it may not do so is just as bizarre – Italian milk quotas.

Agreement on the tax savings’ directive has been held up because of a roadblock in the shape of Italian farmers who want to delay the payment of around euro 650m of fines for breaching EU milk production limits.

Once this has been agreed, Rome will forego its objections to the directive – such is the way that the European Union works.

But, after five years of laborious struggle, it may just about find its way onto the EU’s statute books.

Next month, a meeting of European finance ministers should finally get around to approving a savings tax directive which could come into force as early as January next year – and if they do, expect one almighty row.

The basic plan is quite simple and on the face of it largely uncontroversial.

Brussels has long been arguing, since 1998 in some cases, for its members to curb tax evasion by European residents. Its aim is to ensure EU residents cannot avoid or evade tax in their home member state through not declaring income received from investments in another member state.

The proposal, which only relates to EU residents, will cover interest from savings of every kind, including bonds. It wants the 15 member states of the EU to collect private financial data and automatically share that information with the tax authorities of other nations.

The kind of data it had in mind was account numbers, names and addresses of those using accounts and interest payment details. It does not try to set a uniform tax rate across those countries that sign up to the deal but instead is based on sharing information. In addition, the EU originally wanted six other nations to sign up to the agreement, including Switzerland and the US, so that it could be enforced globally.

Also, the EU committed itself to ensuring the measures were adopted in all dependent and associated territories such as offshore jurisdictions including Jersey and Guernsey and Caribbean states such as The Bahamas.

But no sooner had the idea been proposed than it was contested.

Belgium, Luxembourg and Austria campaigned for the retention of secrecy in their banking systems and instead of adopting the directive implemented a 15% withholding tax on savings, which will rise to 35% by 2011.

The offshores, whose banking systems and to a large extent their economies rely on private banking, were appalled. They accused the European Union of seeking to undermine their financial operations and upsetting the ‘level playing-field’ of international taxation. Some are also deciding to adopt a withholding tax.

Guernsey is one offshore that has decided to take this route.

Laurie Morgan, president of the Guernsey’s Advisory and Finance Committee, says: ‘This decision reflects the clear preference of the overwhelming majority of our finance industry. ‘The Committee believes a retention tax on EU resident individuals’ savings interest is in the best long term interests of the island.’

Some in the Cayman Islands upset at plans for the tax have started openly calling for independence from London. Switzerland, protecting one of its oldest industries, has said no to the directive and is also imposing a withholding tax. And the US looked on aghast.

The directive was proof for Washington that Europe is a tax-happy monster.

Tax revenues consume more than 40% of GDP in Europe, and less than 30% in the States.

One financial commentator says the plans should be opposed on the grounds that ‘for no other reason than to antagonise the French’. Seen within the context of worsening political relations following the invasion of Iraq, the bile vented over the tax savings’ directive can be viewed as another way in which relations between the Old World and the New are fast deteriorating.

Reaction in the States to the directive has been fierce and massive lobbying of the Bush administration soon got underway.

And business has the ear of the Bush regime. Late last year the US said it would not sign up to the directive. This seriously undermines the directive’s effectiveness but the American blow is not fatal.

The whole thing has caused a right old row. But beyond the war of words there is, potentially, a lot of money at stake. The amount of funds that could still be affected by the change could run into billions.

The US economy has attracted more than £9trillion of overseas capital, much of it from Europe. A substantial part of that could still leave if the directive comes into force as large amounts of capital take flight.

In Germany alone, some (TM)350bn savings are held outside the country. Those kinds of figures could be replicated in other countries across Europe.

And despite the objections of many across the world, if the directive comes into force it will be important politically as well as economically.

‘It is the first step. It shows that the European Union can do something when it comes to tax and it may lead it to other non-taxed streams of income,’ says Mattias Levin, a research fellow at the Brussels-based Centre for European Policy Studies.

Who knows, it might be one of the first steps towards tax harmonisation in Europe. And that would prompt a row that makes the fuss over the tax savings’ directive look like a picnic in comparison.


The European Union has been very active in recent weeks, regarding legislation that affects accountants and auditors, writes Mark Rowe.

Earlier this month, the Commission issued a recommendation on statutory auditors’ independence within the EU, indicating that auditors who have a relationship with their client that might compromise the auditor’s independence should be prohibited from carrying out statutory audits. The EU expects the recommendation to be immediately applied with a view to making it legally binding in three years’ time.

In addition, on May 6 the EU Council of Ministers formally adopted an amending standards directive that will allow member countries which do not apply international accounting standards to all companies to bring in matching transparent, high quality financial reporting.

The move is designed to pave the way for like-for-like financial comparisons throughout the EU and will also make it harder for companies to ‘hide’ liabilities by setting up artificial structures that they control in substance but which are owned by different shareholders.

Another directive was formally adopted by ministers on May 13 when several thousand small and medium-sized companies throughout the EU were exempted from certain accounting provisions following an agreement between EU member states on raising qualifying thresholds.

In addition, the proposed takeover directive has sparked continued opposition from the UK and Germany, who objected to key aspects of the proposal which aims to limit national mechanisms to frustrate takeover bids. Germany had expressed fears that its national companies would be vulnerable to predators under the proposal. The directive was further discussed last month by the EU’s finance ministers.

In March, the commission tabled a transparency directive standardising the minimum amount of information provided by companies whose securities and shares are traded on stock exchanges and other regulated markets.

The directive would require all securities issuers across the EU to disclose to the public an audited annual IAS financial report and a management report, within three months of the end of each financial year.

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