private savings contracts posing as life insurance up to the
scaffold as part of its drive to cut Europe’s estimated €200
billion evasion of tax. However, the proposals face stiff
opposition that could take years to overcome, reports
Brussels-based Jeremy Woolfe.
The European Union’s (EU) Savings Tax Directive (STD), which
became reality in July 2005, means that individual savers with
funds held across borders have to pay tax on interest just the
same, under whatever rules apply in their country of residence.
They have to because the STD lays down that the European country
where the funds are held has to pass the relevant information back
to the “beneficial owner’s” tax authority.
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There are exceptions. Austria, Belgium and Luxembourg are
permitted to retain bank secrecy laws, so just pass back
“withholding tax”, without revealing ownership. However, there are
more than exceptions. There are loopholes. The European Commission
(EC) describes the present version of the STD, aimed to crack down
on tax evasion by wealthy private individuals, as being “easy to
circumvent”.
EU Taxation Commissioner, László Kovács, stresses: “The current
scope of the Directive needs to be extended. This is in order to
meet our goal of stamping out tax evasion, which affects the
national budgets and creates disadvantages for the honest
citizens.” He has now published a more stringent version of the
STD.
One loophole concerns savings disguised as life insurance. In a
commentary on its proposals, the EC stated that it intends 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”.
Kovács explained that he wants to eliminate life-insurance
contracts whose performance is strictly linked to income from debt
claims or equivalent income and have less than 5 percent risk
coverage.
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By GlobalDataHow important is the life insurance mechanism in its use for tax
evasion? An EC official told LII that “we have no exact
figures”, adding “without figures, it is very complicated to tell
whether it is a minor device and to what extent it has grown”. This
is hardly surprising. Personal wealth advisors keep their figures
well out of sight.
However, the official is sure that the life insurance technique
does involve UK offshore tax havens. Moreover, she added, the tax
avoidance system is used by individuals all over the EU.
Another dodge the EC would like to bring into the scope of the
enhanced STD deals with income from securities which are equivalent
to debt claims (of which the capital is protected and the return on
investment is predefined). The proposals also cover trusts or
foundations outside the EU.
Under the revisions to the STD the EC, striding further along
the reformist road, proposes that paying agents in the EU would be
required to use any information available to them, including data
recorded under money laundering rules.
Bill Dodwell, tax partner at professional services firm
Deloitte, pointed out that banks would have to upgrade their IT
systems in order to record a much wider range of information. When
they are paying interest to trustees they will need to record the
beneficiary concerned, including such details as where those
beneficiaries live and perhaps what the beneficial interest in the
trust is.
Lobbyists opposing the STD rehearsed their position at a meeting
held in Brussels prior to Kovács’s announcements. Defence of the
status quo, that is, little or no change to the STD, was backed by
some members of the European Platform for 3rd Country FSCs
(financial service centres), an organisation that exchanges views
on EU issues in the areas of banking, securities, insurance,
accounting, corporate governance and taxation.
Speaking at the Platform’s meeting, international tax lawyer,
Richard Hay, of Stikeman Elliot, London, warned that “EU exclusion
[of capital] will steer Europe’s international financial centres
towards the US, Asia and Middle East.”
He defended the position of offshore tax jurisdictions, which he
labels as “international financial centres” (IFCs). Hay said that
investors in mutual funds, international pension plans, insurance
and reinsurance use IFCs for reasons of tax neutrality, not
secrecy.
Subsequently Jersey’s financial industry body, Jersey Finance,
complained that the STD had already “driven a significant amount of
grey money to jurisdictions beyond the reach of the relevant taxing
authorities”.
It advocates “robust anti-money laundering regulations… for
tackling tax avoidance in the EU”. Jersey’s net asset value of
investments approaches £500 billion ($780 billion).
In Brussels, Karel Lannoo, secretary general of the European
Capital Markets Institute (ECMI), sees that any homing in of blame
on offshore funds during the present financial crisis is
unwarranted panic.
Lannoo sees it as nothing more than a tactic by Brussels-based
officials to divert attention from the real issue, the under
capitalisation of on-shore banks. Offshore banks are well
capitalised, he pointed out.
The whole matter of the STD is now in the hands of the 27 EU
national finance ministers who are likely to agonise over reaching
consensus. Under EU rules accord must be unanimous on taxation
issues.
A crucial item that escapes the EC proposals, but must
nevertheless be on the table, is the positions of the exchange of
information opt-out countries. Their levy of withholding taxes on
interest on savings, currently 20 percent, goes up to 35 percent in
2011.
Against a background of political pressures to clean up
financial legislation generally, and the financial turmoil, how
long could their discussions last? Years, is the general feeling.
Dodwell believes that it will probably not take the five or six
years that the pioneering version of the STD took.
“But I am sure that you are talking about three or four years”,
he told LII.
A “cautious” reaction to the STD revisions comes from the
European Funds & Asset Managers Association (EFAMA), whose
members’ assets exceed €7 trillion ($9 trillion). Peter De Proft,
EFAMA director general, told LII that the revisions after
only three years are “early”.
A statement from EFAMA points to “newly imposed administrative
cost burdens” but welcomes the move towards “a level playing field
among competing savings products”.
