Saving Taxation Directive ‘a failure’ – Deutsche Bank
Charlot Zahra
A recent Deutsche Bank report describes a European Commission proposal on the Saving Taxation Directive as ‘a failure’, this newspaper has learnt.
Five years after the ECOFIN Council agreed on the directive, the EC last November submitted a proposal on its extension.
The goal pursued by the Commission and a number of Member States remained the same – to eliminate or reduce circumvention and evasion of the payment of tax by private investors on their cross-border interest income.
Adopted in 2003 and applied in 2005, the directive follows the basic principle that individuals’ interest income should be taxed in accordance with the laws of their country of residence.
Meanwhile, the total amount of interest declared to Malta for economic activities of German citizens amounted to a paltry €49,430 in 2006, while the amount of interest declared by Germany for economic activities of Maltese citizens ranged into the millions of euros.
In 2006, prior to Malta joining the euro, the amount of interest declared by Germany to Malta stood at €32.297 million, while in 2008 the amount of interest declared by Germany to Malta plummeted to €4.254 million, also in view of an amnesty on undeclared funds by the Maltese Government prior to Malta joining the euro area.
The DB report, a copy of which was seen by Business Today, says that “the bottom line is hardly surprising – the Savings Taxation Directive is very easy to circumvent, particularly by using interposed investment vehicles, such as foundations and trusts, and by restructuring investment portfolios into certain financial instruments, particularly life insurance contracts, equivalent to those already explicitly covered, so that income does not constitute the payment of interest as defined in the directive.”
The bank explained that the Savings Taxation Directive was “only one element of current endeavours by the majority of EU member states to enforce their right to charge tax beyond their internal borders.
There are presently further initiatives, both by the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD), “to improve cooperation between the tax authorities while also stepping up their battle against so-called ‘tax havens’.”
G20 countries had “similarly increased pressure on many ‘tax havens’ to transpose existing standards – such as those set by the OECD – into agreements and to provide for greater transparency and exchange of information.
“More has been achieved in this respect since January 2009 than in the previous 15 years,” the authors of the report insisted.
The DB report explained how the prevailing political climate for more cooperation and exchange of information between the States had “improved significantly” in recent months.
“A flurry of new bilateral agreements, initiatives at OECD level and further EU proposals for directives underscore the momentum that has gathered here,” the DB said.
In addition to many technical modifications, the amending proposal focused essentially on extending the scope of application of the directive.
Specifically, it is planned to broaden the definition of the term interest income and expand the group of persons concerned.
“This will result in more administrative work and expense, but also in greater transparency,” the report explained.
From an economic perspective, “efficient cross-border taxation, that is, capital export neutrality, should be the aim, with a view to avoiding distortions in investment decisions.”
Broadening the directive towards more equal treatment of different investment vehicles could “therefore be appropriate”.
But despite all this co-operation and more intensive exchange of information, the EU must not lose sight of the limits and costs of such a policy.
“Government overdrive must not be permitted to hamstring individuals and businesses in their economic choices,” Deutsche Bank said.
Moreover, tax competition helped, in a positive sense, “to confine government’s fiscal acquisitiveness to a level in tune with its citizens’ preferences.”
Information exchange is currently the rule in 24 of the 27 Member States. The competent authorities in the Member States automatically issue details – consisting of at least the account number, identity, name and address as well as interest payments – on interest paid by the so-called paying agent – as a rule a bank – to the beneficial owner, that is, the recipient of the interest.
However, a transitional arrangement existed for three States – Austria, Luxembourg and Belgium.
“During the transitional period the States are not obliged to provide information on interest payments. Instead they levy a withholding tax of at present 20 per cent,” the DB report explained.
However, Belgium recently announced its intention to adopt the automatic data exchange system and amend the relevant agreements on this.
As from 1 July, 2011 the Directive stipulates a rate of 35 per cent – 75 per cent of the revenues generated are transferred to the Member State of residence of the beneficial owner, while the rest may be retained by the withholding state.
The beneficial owner’s member state of residence must also ensure the elimination of any double taxation of the interest payments which might result from the imposition of this withholding tax.
It can do so by crediting the withholding tax paid and reimbursing any excess tax withheld.
However, beneficial owners may also opt to take part in the automatic information exchange regime in member states that operate the withholding system.
The transitional period will not end until Switzerland, Andorra, Liechtenstein, Monaco and San Marino can guarantee “effective and comprehensive exchange of information on interest payments”.
Additionally, the Council must decide unanimously that the USA had committed to providing information on request. However, the countries concerned might also introduce automatic data exchange of their own accord.
The scope of the directive covered interest payments on debt claims – such as cash deposits, account balances, loans, bonds and income from investment funds that invested more than 40 per cent of their assets in interest-bearing securities.
It did not, however, comprise all other income from “investment funds, dividends, certificates, interest on claims arising from life insurance contracts and pensions, certain transferable debt claims and also gains from shares, among other things”, DB warned.
Under the Directive, the tax liability extended only to individuals but did not cover legal entities such as companies, foundations or trusts.
