Offshore Survey – April 2004 by Christopher Owen
Swiss stall EU Savings Tax Directive The UK and the Netherlands confirmed that their dependent territories had agreed to comply with the proposed European Union Savings Tax Directive at the monthly Ecofin meeting in Brussels on 9 March. The Directive is targeted at preventing tax evasion by EU residents who make cross-border investments. But EU finance ministers accused Switzerland of threatening to scupper the Directive by delaying the related agreement that would introduce a similar tax on the Swiss savings of EU residents. Pressure is growing as a June deadline approaches for a deal to be struck to allow for the Directive to come into force on January 1 next year. It is one of the elements of a tax package aimed at tackling harmful tax competition in the EU, which was formally adopted by the EU?s finance ministers on 3 June 2003. Under the measure, 12 EU states will share the banking details of EU citizens. Luxembourg, Belgium and Austria will retain their bank secrecy laws but will impose a withholding tax on the income from savings of EU residents. The Directive is contingent upon the EU signing deals with third countries ? Switzerland, Liechtenstein, Monaco, San Marino and Andorra. Switzerland reached an agreement with the EU last year under which it retained banking secrecy, in exchange for a withholding tax applied at source. But the Swiss government is now linking agreement on the savings tax with parallel negotiations on the EU’s Schengen system of free movement of people ? a demand which has been rejected by the EU. “The agreement with the Swiss government has been concluded and there are no loose ends,” said EU tax commissioner Frits Bolkestein. “Since that agreement has been concluded, it ought to be signed, sealed and delivered.? Switzerland denied that it was making any new demands. Chief negotiator Michael Anbuhl said: “We are not trying to delay these negotiations. From the very beginning of the negotiations in July 2000 we said it would be a negotiating package and that these issues would be decided together.” Bolkestein said the Commission has made considerable progress with Liechtenstein, Andorra, and Monaco, but was having problems in getting the republic of San Marino, in central Italy, to back the new EU tax regime. He said it could rely on the support of Italy to assist in reaching an agreement. In February, the Cayman Islands, a UK overseas territory, finally agreed to enact appropriate legislation to implement a modified form of the EU directive by 30 June. The move followed threats by the UK to enact legislation to force it into line. The UK has assured the Cayman Islands of a level playing field. In a letter from UK Paymaster General Dawn Primarolo dated 12 February, the UK government outlined the steps that they expected the Cayman Islands to take within certain deadlines and set out the conditions and undertakings required for compliance. ?An important condition in relation to the Savings Directive is that the relevant measures come into effect at the same time in EU Member States and the named dependent and overseas territories. No one should be expected to go first,? she said. An EU body will monitor compliance with the deadline and decide at the end of June 2004, whether it is feasible for all parties. Primarolo also acknowledged the importance of including the ?third countries? for universal compliance. Chief secretary of the Cayman Islands McKeeva Bush said: ?If even one of these countries does not implement the Directive, then neither will we.? Cayman is thought to have requested three key concessions in return for complying with the Savings Directive ? increased access for Cayman financial instruments to the European market, EU recognition of the Cayman Islands Stock Exchange and investment in the Caymans airport expansion programme. Cayman was the last of the UK?s Caribbean territories to agree to implement the savings tax directive. It was particularly concerned that Bermuda, another UK overseas territory, was not currently subject to the requirements of the Directive, because of an oversight in the wording of the EU agreement. The EU wording only refers to the requirements applying to the UK?s Crown Dependencies ? Jersey, Guernsey, and the Isle of Man ? and the Caribbean overseas territories ? the Cayman Islands, Anguilla, British Virgin Islands and the Turks and Caicos. It is anticipated that this will be changed to include Bermuda specifically. The Crown Dependencies have reported that they are close to gaining approval from the European Commission for a common model agreement on exchange of information to implement the European Union Savings Tax Directive. Designed to ensure a level playing field between the Channel Islands and Isle of Man, it will be used in their bilateral dealings with the 15 existing and 10 new EU member countries to implement the directive.UK Budget cracks down on tax avoidance UK Chancellor Gordon Brown announced, as part of the Budget on 17 March, a new disclosure measure requiring those who devise and market certain avoidance schemes to provide the Inland Revenue with details in advance. Brown said he did “not at this stage intend to introduce” a general anti-avoidance rule, as has been implemented in Australia and Canada. Instead he chose to follow the US approach, which relies on voluntary disclosure. Advisers will have to provide a description of the scheme and the tax consequences. The Revenue will register the schemes and allocate each a reference number. Taxpayers using such schemes will have to include its registration number on their tax returns. Where schemes have been devised in-house or offshore, the onus will fall on the taxpayer to provide details to the Revenue. The measure targets schemes and arrangements based on financial products and employment-based products. Full details of the conditions, with penalties for non-disclosure, are scheduled to accompany the Finance Bill on 8 April, but will apply retrospectively from Budget day. In other changes, businesses that use or market VAT avoidance schemes and have supplies of £600,000 or more will have to disclose the use of such schemes to Customs and Excise or risk a penalty of 15% of the tax avoided. Businesses with supplies exceeding £10 million a year will have to disclose schemes that have “certain hallmarks of avoidance”. Failure to do so will incur a flat-rate penalty of £5,000. The Chancellor also moved to close certain specific loopholes: companies that realise capital from partnerships face a charge to corporation tax; individuals may no longer use life insurance policies to generate deficiency relief; individuals and trustees will not gain tax benefit from stock lending transactions involving UK equities; individuals may not avoid income tax by manipulating the market value of strips of government bonds. It was announced that the Inland Revenue and Customs & Excise have begun discussions with the tax administrations of Australia, Canada and the US to establish a joint task force to increase collaboration and coordinate information about abusive tax transactions. They plan to share expertise, best practices and experiences within the framework of the four countries’ existing tax treaties. Representatives of the four administrations will be meeting shortly to finalise plans for this initiative.