The European Commission proposes changes to eliminate tax evasion
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The European Commission has adopted an amending proposal to the Savings Taxation Directive, with a view to closing existing loopholes and eliminating tax evasion. Since 2005, the Savings Directive ensures that paying agents either to report interest income received by taxpayers resident in other EU Member States or levy a withholding tax on the interest income received.
The Commission proposal seeks to improve the Directive, so as to better ensure the taxation of interest payments which are channelled through intermediate tax-exempted structures. It also proposes to extend the scope of the Directive to income equivalent to interest obtained through investments in some innovative financial products as well as in certain life insurances products. Moreover, simplification of the technical operation of the Directive should lead to a more user friendly system and more efficient implementation.
László Kovács, Commissioner for Taxation and Customs, said: “The first report on the operation of the Savings Taxation Directive concluded that the Directive, although effective within the limits of its scope, can be easily circumvented. The current scope of the Directive needs to be extended, in order to meet our goal of stamping out tax evasion, which affects the national budgets and creates disadvantages for the honest citizens.”
Determining the effective beneficial owner of interest payments
The first review of the Directive has shown that, at present, it is relatively easy for individuals to circumvent the rules by using interposed legal persons or arrangements (like certain foundations or trusts) which are not taxed on their income.
As far as interest payments are made by paying agents (banks, financial institutions, independent professionals, etc.) established in the EU to certain intermediate structures (listed in the compliance list in Annex I of the proposal) established outside the EU, the Commission proposes that paying agents in the EU (who know, under the anti-money laundering provisions that the beneficial owner of the interest payments is an individual resident in the Union) apply the provisions of the Directive (exchange of information or withholding tax) at the time of the payment to the intermediate structure, as if this payment was directly made to the individual.
Concerning payments of interest to certain intermediate structures established within the EU, including some non-charitable trusts and foundations, those structures will be always obliged to act as a “paying agent upon receipt”. This means that the provisions of the Directive (exchange of information or withholding tax) must be applied by these structures upon receipt of any interest payment from any upstream economic operator (bank, financial institution, independent professional), no matter where they are established and regardless of the actual distribution of any sums to the individual beneficial owners. The suggested definition of “paying agent upon receipt” includes all entities and legal arrangements (trust foundations etc) which are not taxed on their income under the general rules for direct taxation in their Member State of residence/establishment (an indicative list of those entities and legal arrangements will form Annex III of the Directive).
Extending the scope to income equivalent to interest payments
The Savings Taxation Directive can also be circumvented by using innovative financial vehicles instead of a classical savings account in a bank.
Therefore, the Commission proposes extending the scope of the Directive to income from: securities which are equivalent to debt claims (of which the capital is protected and the return on investment is pre-defined), life insurance contracts whose performance is strictly linked to income from debt claims or equivalent income and have less than 5% risk coverage.
Income from investment funds
In addition, the Commission proposal seeks to ensure a level playing field between all investment funds or schemes (be it undertakings for collective investment in transferable securities authorised in accordance with the UCITS Directive or not), independently of their legal form. This means that income obtained from those investment funds by individuals resident in the EU will be subject to effective taxation.
On 1 July 2005, the provisions of the Savings Taxation Directive started to be applied by all EU Member States. The purpose of the Savings Directive is to promote exchange of information automatically between Member States and thereby enable them to apply their own taxation rules to interest payments which their residents receive from paying agents in other Member States. Belgium, Luxembourg and Austria, instead of exchanging information automatically, are obliged to levy a withholding tax at a rate of 20% on a transitional basis, until 30 June 2011 and at a rate of 35% thereafter. Nevertheless, citizens receiving interest in these 3 Member States may opt individually for the exchange of their information and then no withholding tax is levied.
The same or equivalent provisions to the Directive (exchange of information or withholding tax) have also been applied in 5 European third countries (Switzerland, Liechtenstein, Monaco, Andorra and San Marino) and in 10 dependent or associated territories of the United Kingdom and the Netherlands (Anguilla, Aruba, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Montserrat, the Netherlands Antilles as well as the Turks and Caicos Islands) through the implementation of bilateral agreements.