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16th Sep 2019

EU to become world's worst place for tax cheats

  • Semeta: 'Luxembourg and Austria have to stick to the instructions of the heads of state' (Photo: Alan Cleaver)

The European Commission has said the EU is building "the most comprehensive information exchange system in the world" to combat tax dodging.

Algirdas Semeta - the Lithuanian commissioner behind a series of new tax laws - made the claim in Brussels on Wednesday (12 June).

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He told press his regime goes further than recent US legislation, the Fatca law, which says foreign banks can lose their US licence if they do not share information on US account holders.

"The EU system will become even broader than the US system," he noted.

Semeta spoke after tabling a new bill, an amended version of the EU's existing Administrative Co-operation Directive (ACD).

The old ACD forces EU countries to share information on non-residents' employment income, director's fees, life insurance products, pensions and real estate assets.

But it contains a loophole, saying data can be withheld if it is not easily "available."

The updated ACD says the availability clause should be reviewed in 2017.

It also calls for information sharing on "dividends, capital gains, other financial income and [on] account balances" from 2015 whether the data is easily available or not.

Semeta is at the same time herding EU countries to adopt his amended Savings Tax Directive.

Under the old savings law, EU countries tell each other how much interest non-residents earn on bank deposits.

But they do not share data on interest arising from investment funds, pensions, innovative financial instruments, trusts or foundations.

Meanwhile, two EU banking centres - Austria and Luxembourg - are exempt.

Semeta said the updated savings law closes the loopholes and will be adopted by the end of the year in line with a promise by EU leaders in May.

"Luxembourg and Austria have to stick to the instructions of the heads of state," he noted.

He added there is "new momentum" in EU capitals to adopt a third proposal, the Common Consolidated Corporate Tax Base (CCCTB), as well.

Corporate tax avoidance - creating structures which are legal, but which are designed to avoid paying levies in high-tax countries - costs EU treasuries €150 billion a year.

Semeta said "if we implement the CCCTB at EU level, then the problem of transfer pricing, where companies shift profits from one country to another, would simply disappear from the Union."

Independent experts welcome the updated savings tax bill.

Mark Morris, a tax specialist at the Baker & McKenzie law firm, said it is unique because it "pierces" the secrecy of "untaxed entities and legal arrangements."

Entities such as trusts and foundations hide the real owner of the money to avoid tax.

But Semeta's law says if the owner cannot be identified, then the tax disclosure burden falls on whoever is entitled to income from the entity, whoever contributed money to set it up, or whoever manages it on the owner's behalf.

It also obliges entities to declare money held in exotic jurisdictions, such as the British Virgin Islands (BVI).

"No previous tax law in the world since the time of the Crusaders [Medieval times] has been able to pierce these structures because the beneficial owner is always hidden," Morris noted.

John Christensen - the British chief of the Tax Justice Network (TJN), an NGO - called the amended savings law "a major step forward in the battle against tax evasion."

He noted the EU information exchange model is "multilateral" in nature, but America's Fatca is "unilateral" and has less scope for adoption by the G8 or G20 clubs of leading nations.

"We would like to see the EU approach become the basis for a global standard," he said.

Baker & McKenzie's Morris and another TJN analyst, Markus Meinzer, voiced reservations on the new ACD, however.

Morris said it will be "toothless" if it does not contain the same provisions on trusts and foundations as the savings tax bill.

Meinzer said it leaves several questions unanswered: "Who would be responsible for collecting all the information? How do you treat dividends paid by a trust, for instance? How do you treat capital gains paid by a trust to a company based in a place like the BVI?"

He added: "If these kinds of issues aren't addressed, then this proposal is doomed to be easily circumvented."

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Tax wars: EU playing catch-up with US

The EU has promised to create the world's leading tax transparency regime. But it is playing catch-up with Fatca, the equivalent US legislation.

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