Brussels to close loopholes in tax evasion legislation

"Brussels to close loopholes in tax evasion legislation"
Article published by Vanessa Houlder in London and Nikki Tait in Brussels in Financial Times (www.ft.com) on November 13 2008

Brussels will today step up the pressure on international tax-dodgers when it unveils proposals for bolstering the European Union's savings tax system.

The European Commission is expected to close some of the loopholes in the savings tax directive, the EU's flagship initiative against tax evasion which came into force three years ago.

The directive originally aimed to flush out tax evaders by requiring exchange of information between countries, or withholding tax on payments in third countries, such as Switzerland, Liechtenstein and Andorra.

But critics say the omission of trusts, foundations and companies from the legislation allowed evaders to sidestep the directive's intended effect.

The Commission acknowledged coverage had been not as wide as originally anticipated after it reviewed the directive's implementation this autumn. Officials proposed technical amendments in four main areas.

They admitted that the directive had dealt only with interest payments made for the immediate profit of individuals resident in the EU - giving people an opportunity to circumvent the rules by interposing another legal person or arrangement situated in a non-EU country.

A possible solution would be to ask "paying agents" - such as banks - to use the information already available to them under anti-money-laundering rules about the ultimate beneficial owners of outgoing payments.

But the proposed changes could be controversial. The European Policy Forum, an independent think-tank, said last week that it believed extending the directive would risk an own goal because it would impose a heavy compliance burden on member states' financially vulnerable banking sectors.

A highly critical report by the EPF said the directive had not fulfilled its original goals: "Member state governments have found the exchange of information model difficult to apply with a number of countries reporting long delays, inaccurate data and a range of problems centring on pursuing reports of interest income received by taxpayers in other countries."

It warned there was "a real danger that an extended directive would simply add to banks' cost base for little net benefit". The 1,243 leading banks in the EU and Switzerland would face an additional bill of nearly €700m ($877m, £587m) from an extension of the directive, the EPF calculated. That compared with initial compliance costs of €753m, with annual compliance costs of a further €693m.

The EPF said extending the directive's scope would be time-consuming, and that it would be costly for banks to be certain whether income received from a particular financial product fell within the directive's catchment area or not.

The higher compliance costs might force banks to withdraw credit facilities to businesses and households. "Given the relatively modest amounts raised by the directive to date and the fragile status of many banks across the EU . . this would appear to be a misguided policy -initiative."