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Brussels, 13 November 2008
(see also IP/08/1697)
Why is the Commission proposing changes to the Savings Directive?
What are the changes proposed?
First, the Commission proposes to improve the Directive so as to better ensure taxation of interest payments which are channelled through intermediate tax-exempted structures.
Second, the Commission proposes to extend the scope of the Directive to income obtained from investments in some innovative financial products with capital protection (less than 5% risk coverage) and in certain life insurance products.
Third, the proposal brings a major reduction of administrative burden for individuals who opt for exchange of information in Austria, Belgium or Luxembourg where they receive interest payments and therefore claim exemption from withholding tax. The proposal asks that the paying agent will directly report information to the tax authorities, at the request of the individual who authorize it, in place of levying the withholding tax.
Fourth, the Commission proposes to ensure a level playing field between all investment funds or schemes, independently of their legal form.
Fifth, it proposes technical improvements which are beneficial for the activity of paying agents, such as a clearer treatment of investment funds established in a country different from the one of the paying agent and a clearer guidance for Member States in order to avoid possible cases of duplication of paying agent responsibilities.
What experience do you have on withholding tax till now?
The table below displays available information, for the countries levying a withholding tax, about the amount of revenue shared with the other Member States.
The sum of the tax revenue shared in 2006 by countries applying the withholding tax regime is 500 million €. It corresponds to 75% of the withholding tax collected by those countries applying the withholding tax system. Given that 25% of the amount collected is kept by the country having levied the withholding tax, the total tax withheld is about 670 million €. If one assumes that the withholding tax was 15%, this would represent total interest payments of about 4.5 billion €.
What experience do you have on exchange of information till now?
It has first to be noted that the data provided by Member States and other jurisdictions covered by the savings taxation measures contain a critical number of missing values. This leads to the problem that the data must be interpreted with caution, since missing values significantly reduce the number of observations for certain jurisdictions.
The data on information exchange from EU Member States and other jurisdictions show that reported interest payments increased significantly between the second half of 2005 and 2006. Unsurprisingly, the largest payments can be found in the largest economies.
The total amount of interest payments made, for which information was exchanged, is shown in the following table. It has to be stressed that it does not correspond to any amount of tax collected. The Member States, having been informed that interest payments were made to individuals resident on their territory, have then applied, if appropriate, a tax according to their own tax regime. Given that the tax regimes within the MS differ from each other, it is impossible to give an estimation of the amount of money collected corresponding to the interest payments reported
[ Figures and graphics available in PDF and WORD PROCESSED ]
Taking the very conservative assumption that the UK would report a similar amount for the fiscal year 2006 to what it reported for the period between July 2005 and April 2006, it can be extrapolated that the total of interest payments made for which information was exchanged is 20bn € in 2006.
Do you have any data on money leaving the EU due to the application of the Savings Directive?
The economic analysis made by the Commission has shown that:
Doesn't this proposal create extra burden for paying agents?
Under the money laundering Directive the paying agents should already have the information requested.
Moreover, the introduction of the new annex (indicative compliance list) will bring more clarity and legal certainty to paying agents. Furthermore, the proposal contains technical improvements which are also beneficial for the activity of paying agents, such as a clearer treatment of investment funds established in a country different from the one of the paying agent and a clearer guidance for Member States in order to avoid possible cases of duplication of paying agent responsibilities. .
Given that the scope of the Directive is extended to ensure a level playing field between equivalent products and intermediaries, it is clear that the proposal will introduce new burden on some paying agents that are not yet in the scope of the Directive (some trustees and some insurance companies).
Given the financial crisis, should the Commission not be more ambitious and extend the exchange of information to income other than interest (such as dividends ...)?
Some voices have called for a more radical extension of the scope of the Directive to any kind of investment income. The Savings Taxation Directive may, however, not be the most suitable framework for improving cooperation between tax authorities for those items of income whose tax treatment varies considerably between Member States (like dividends or capital gains from those speculative financial instruments which do not provide substantial capital protection).
Solutions based exclusively on the exchange of information would also seem more appropriate for the purpose of ensuring that neither double taxation, nor avoidance of any taxation, arise in relation to those life insurance contracts where a significant share of the premiums paid serve to cover risks, or with regards to pensions.
The Commission is currently working on a review of the Directive on Mutual Assistance between the tax authorities of Member States (Directive 77/799/EEC) that could improve the conditions for cooperation on these forms of income. Proposals should be expected before the end of this year.
What about external competition (financial centres outside EU)? How will the Commission proceed with the third countries which are currently part of the Savings Tax network?
Once Member States agree on the ways of closing existing loopholes, the Council is expected to ask the Commission to examine with non-EU countries and jurisdictions participating in the mechanism as to how to update the respective agreements in a similar way. However, it is premature to speculate today on how they will react to our approach, as the EU first needs to reach a unanimous agreement internally.
Following the request of the ECOFIN Council, the European Commission launched discussions with selected important financial centres, namely Hong Kong, Singapore and Macao in order to extend the geographical scope of the existing Directive. The discussions are on-going at present and it is too soon to anticipate their outcome.
Formal negotiations will start shortly with Norway, at its request, whilst other jurisdictions like Bermuda and Iceland have shown interest in participating in the savings taxation arrangements.
Is the Commission creating a black list of countries through Annexes provided in the amendments?
NO! Annex 1 of the proposal does not have anything to do with the so-called "black-list" of tax heavens. Annex 1 is based on an analysis of the tax regime of the specific entity or legal arrangement in the corresponding named jurisdiction mentioned. Only those entities and legal arrangements to which EU resident individuals can have access as beneficial owners and which are not subject to effective taxation on their income in that jurisdiction are mentioned in the list. Its purpose is to facilitate the job of the paying agents in executing the application of the Directive. Appropriate procedures are provided to amend the list if the information contained in it needs to be updated.
To which income does the Commission propose to extend the scope of the Directive?
The Commission proposes to extend the scope of the Directive to cover substantially equivalent income derived from those products that, from the investor's viewpoint, can be regarded as equivalent to debt claims because their risk is known and is not higher than that of debt claims.
Therefore, the proposal extends the scope of the Directive to the following products:
The possibility to include a positive list with the products that meet these criteria was eventually discarded for practical reasons, associated with the rapid developments in the financial markets that would very quickly make the list obsolete: any updating of the list would come too late. The Commission considers that the above described criteria for identifying the products concerned provide enough clarity to paying agents and that a detailed list is not necessary.
What will be the consequences for those who receive money from foundations?
What does the Commission propose with regard to investment funds?
Currently, income obtained by individuals through some investment funds (mainly investment funds subject to the UCITS Directive) is already within the scope of the Directive. The Commission proposes to extend the scope of the Directive to all investment funds or schemes, wherever located and independent of their legal form and regulatory regime, having invested in debt claims or other equivalent securities. For this purpose, all the current references to the UCITS Directive for investment funds established in the EU will be replaced by a reference to the registration of the fund in accordance with the domestic rules of any of the Member States; for investment funds established outside the EU, a broad definition of investment funds or schemes based on concepts prevailing at OECD level will be used.