EU Savings Tax Directive Outsmarted

The EU Savings Tax Directive that will be implemented on the 1st of July 2005 and reviewed in 2007 will largely fail in its attempt to clamp down on cross border tax evasion according to a number of senior European bankers.

Because the Directive has been massively compromised it is so full of loopholes that many affected investors have simply restructured their holdings so that they legally fall outside the scope of the Directive.

The key point of the Directive is to uncover and tax any interest earned on savings (including bank account deposits) placed by EU citizens outside their home countries; but many affected citizens have simply moved their financial assets to another unaffected jurisdiction or placed their holdings into various trust like structures thus removing their assets from the scope of the Directive.

And it’s not like people have had to leave their planning and structuring to the last minute either; the Directive has taken around a decade to even come close to implementation.  During the years of negotiations the Directive has had to be massively reworked and compromised to reach the point where the 39 countries involved agreed to its implementation.

One of the key sticking points throughout was that countries like France and Germany who lose out financially as a result of the billions of Euros invested ‘offshore’ were trying to get countries like the UK and Luxembourg to sign up to the Directive - countries like these actually profit substantially from money invested in their ‘offshore’ jurisdictions - so right from the start the Directive faced substantial political and fiscal hurdles.

Over the years of negotiations between Andorra, Anguilla, Aruba, Austria, Belgium, British Virgin Islands, Cayman Islands, Channel Islands, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Isle of Man, Italy, Latvia, Lichtenstein, Lithuania, Luxembourg, Malta, Monaco, Montserrat, Netherlands, Netherlands Antilles, Poland, Portugal, San Marino, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turks and Caicos and the UK an agreeable compromise has finally been reached whereby only interest income earned by individuals from certain savings and bonds will be within the scope of the Directive.  Please note: this can affect any money held by an individual in an offshore bank account.

But according to Charles Hermann from KPMG in Switzerland for example, the Directive is so full of holes that investors will simply readjust their holdings to continue to legally avoid taxation.  Furthermore, the Directive will have exactly the opposite of the desired effect of bringing investors money ‘back home.’  A number of senior bankers claim that investors will simply get in on the current new trend of placing their money far offshore in ‘safe’ jurisdictions such as Singapore, a country benefiting from a massive influx of investment and a successful free market economy.

So, all in all it seems that the constant watering down of the EU Savings Tax Directive will result in its ineffectiveness and the European Commission will most likely be looking forward to 2007 when the Directive is set to come under review for potential expansion.