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May 1, 2008updated 13 Apr 2017 9:00am

EU goes to war against tax evasion

EU goes to war against tax evasion The European Commission is drum-beating private savings contracts posing as life insurance up to the scaffold as part of its drive to cut Europes estimated 200 billion evasion of tax However, the proposals face stiff opposition that could take years to overcome, reports Brussels-based Jeremy Woolfe.

By Jeremy Woolfe

The European Commission is drum-beating 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.

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.

How 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”.

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