Monday, March 10, 2008

Secrecy and tax in Europe: the EU Savings Tax Directive

The EU Savings Tax Directive aims to tackle tax evasion in Europe and enhance the EU's internal market. TJN has just published a briefing paper with recommendations.

This is in the news: EU Finance Ministers appear to be in the mood now, in the wake of the emerging Liechtenstein Affair, for stiffening the Directive (which is currently full of loopholes) and for accelerating the process of reform. As we indicated in a recent edition of our newsletter Tax Justice Focus, Europe leads the world in terms of thinking of ways to deal with the threats from tax havens, but there is still far to go.

The special interests are already lobbying against the reforms - witness this statement attributed to Luxembourg's Finance Minister Jean-Claude Juncker:

"I look forward to many years of fascinating and fundamental discussions."

Shame on Mr. Juncker. This is perhaps the main tactic - delay - that the secrecy jurisdictions and purveyors of global crime and corruption will wield in their fight against transparency and in their efforts to continue undermining the rights of fellow sovereign nation states to decide their own tax affairs. It is absolutely essential that this reform happens quickly, and that Germany and other EU countries use big sticks to get the reforms underway FAST. Civil society groups in and around Europe now have a right and a duty to push their governments to accelerate and strengthen these reforms.

In essence, the Directive applies to interest (on bank deposits, for example) paid to individuals who are resident in an EU member state which is not the one where the interest is paid. Most EU countries have agreed to exchange data with other jurisdictions automatically. A few of them won an option allowing them instead to preserve the secrecy of information, and instead to apply a witholding tax on interest payments. This second option is used by Austria, Belgium, Luxembourg and all the non-EU jurisdictions that participate (it should be noted here that Jersey and other Channel Islands states are not in the EU - see here for more details.)

The briefing paper looks at the directive and its flaws, and makes a series of recommendations, which can be briefly summarised as follows:
  1. the witholding tax option should be removed so that information is exchanged automatically in all cases;
  2. loopholes allowing several other kinds of legal entities such as private companies and trusts to escape the Directive should be closed;
  3. loopholes allowing certain kinds of income (such as certain insurance products) to escape the Directive;
  4. The Directive's provisions should be extended overseas to places like Singapore and Dubai;
  5. These actions should be taken quickly;
  6. These should be taken as a prototype for the negotiation of international agreements beyond the EU to help tackle tax evasion on a global basis.
(See the briefing paper itself for TJN's full formal recommendations and a more complete explanation of the directive.)

All the above points are essential, but here we will highlight point six in particular. The European model for sharing tax information is vastly superior to the model long peddled by the OECD, as TJN's John Christensen and David Spencer recently explained in a comment article they authored in the Financial Times:

The OECD’s approach to tax transparency requires information to be exchanged with other jurisdictions only on request. In other words, you must know what you are looking for before you request it. This is shockingly inadequate. We need the automatic exchange of tax information between jurisdictions and all developing countries must be included.

It is the EU's model of automatic exchange of information on a multilateral basis, not the OECD's model of information exchange on request and the use of bilateral tax treaties, which is the right model - for the world's developing countries as much as for its rich ones. This should become a prototype for a global model. The prize is potentially quite enormous. A shift towards implementing this type of transparent information exchange could transform the world, though it still needs one more component in place to start moving forwards properly, as our FT comment article explains:

International taxation has been mostly ignored by aid organisations and other civil society groups, partly because it is seen as too complex. It is time for them to wake up. Ending tax haven abuses not only would help the citizens of rich countries but also could do more for developing countries than all foreign aid combined.


Blogger mmiller said...

The general offshoring debate is now showing up in unlikely places, including on a thread on tech-site Slashdot. The issue hit tech sites as a freedom of speech issude during the Julius Baer / Wikileaks blowup, and is now turning into an actual debate of policy.

7:48 pm  

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