The new European Union Savings Tax laws that came into effect on the 1st July 2005 will probably fail in their overall aim of preventing offshore tax evasion.
Loopholes are already being fully exploited via the exemptions of companies and trusts located in offshore tax havens such as the Channel Islands and the Isle of Man for example, and money is being moved to other popular and non-affected offshore centres such as Dubai.
The EU Savings Tax Directive states that tax on interest income from deposits located in offshore bank accounts will be levied at the rate of 15% a year rising to a lofty 35% by 2011. However with careful planning the impact of this new tax directive can be fairly negligible because it is relatively easy to avoid with solutions already in place to counteract the potential taxation impact of the Savings Tax Directive.
It is not known exactly how much revenue is lost every year through offshore tax evasion, however experts believe that in Europe the figure is probably around USD 260 million per year; it could actually be far higher than this.
In order to avoid being caught out by the Savings Tax Directive, EU residents are able to create trusts and companies in jurisdictions like Jersey where establishing a company can literally take minutes and cost less than USD 100. Trust companies in Jersey have experienced rapid growth over the past year with in excess of 200,000 trusts and 34,000 companies already in place.
The movement of money to countries not affected by the European Union savings tax directive has already been intense and is continuing, these non-affected countries have experienced a growth in deposits with deposits in Singapore for example doubling last year to USD 157 billion.
While the EU can claim a degree of success in improving the reporting procedures of many banks in offshore jurisdictions, the ‘game’ is far from over with an equal amount of time and dedication being put into finding tax loopholes as there is in finding ways to plug them up!
In 2007 the EU Savings Tax Directive is due for review and it will be interesting to see what future action the member countries implement in their ongoing struggle against offshore tax evasion.
