EU targets tax evasion on savings

Current EU legislation under the 2005 savings tax directive aims to tackle cross-border tax evasion through an information exchange system for tax authorities among member states. The system helps authorities identify people that receive a savings income but in a member state where they do not live.

The commission proposed to revise the directive in 2008 to close loopholes.

Loopholes include capturing payments made through investment funds, pensions, trusts, foundations and other “innovative financial instruments.”

All member states apply the automatic exchange of information except for Austria and Luxembourg, which negotiated a transitional period.

The transitional period ends when Switzerland, Andorra, San Marino, Monaco and Lichtenstein meet international information exchange practices, though Luxembourg recently announced it would anyway make the shift to automatic exchange in 2015.

The EU has a separate savings tax agreement with the five countries.

All five, including Austria and Luxembourg, impose a 35 percent withholding tax instead of exchanging the data.

A commission paper says the high-level withholding tax “acts as an incentive to be tax compliant."

Switzerland’s withholding tax netted just over €330 million in 2010 but the commission says a broadened agreement would “deliver a substantially higher figure."

Savings aside, the Brussels-executive estimates that €1 trillion is lost to public treasuries annually through tax evasion.

Meanwhile, EU finance ministers are set to discuss a mandate on Tuesday whereby the commission could start negotiations with the five countries to better identify the evaders.

The details of the mandate are confidential.

But one EU official noted that it aims create a structure with the group of five that is equivalent to the savings tax directive among member states

“We expect member states to follow through on this tomorrow,” he said.

He noted that co-operation among member states has already proven effective.

On average, some €20 billion of taxable income is exchanged among member states as well as the five countries in question and other offshore entities like the Isle of Man and the Cayman Islands.

“It may not look like an awful lot of money being reported in contrast to the huge amount of financial flows that are out there but that is €20 billion that wasn’t there before,” he said.

He also pointed out that the commission hopes to reach a proposal on extending the automatic exchange of information on other revenue streams before the summer break.

“We are in a situation where revenue is so important to our member states, where we are surrounded by the low growth forecasts, and essentially no return to growth in the EU up until 2014,” he said.

EU ministers on Tuesday are also set to discuss drawing up a list of tax havens.

The commission has put forward criteria for member states to identify countries that are tax havens.

The concern is that some member states may say one non-EU country is a tax haven while another may not.

To avoid the confusion, the commission says member states need to apply the criteria developed by the Organisation for Economic Co-operation and Development (OECD), a Paris-based economic club, as well as its own EU code of conduct on business taxation.

“If all member states apply the same criteria, they will all end up with the same list, a co-ordinated list on the basis of identical criteria applied in each member state,” says Traynor.