The EU STD: reform is on the way

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I have already mentioned that I made a presentation on the proposed changes to the EU Savings Tax Directive in the European Parliament this week, at their invitation, and speaking as an expert witness on behalf of Tax Research LLP and the Tax Justice Network.

The proposed changes to the STD are summarised here.

The paper that I submitted to the EU Parliament is available here.

The summary of that paper is as follows:

We welcome the planned revisions to the EU Savings Tax Directive (STD) announced on 13 November 2008 subject to the observations made in the report.

We recognise that the STD has one objective, which is to reduce tax evasion. That is the criteria we use for assessment of the proposed changes.

This report notes the often overlooked success of the existing STD. Despite its deficiencies, many of which have been accurately noted in the documentation supporting the proposed changes, it has made a significant contribution to the process of tackling tax evasion, most notably by being a multilateral agreement on that issue, by pioneering bulk information exchange and by including a number of recognised tax havens and third party states in the agreement.

We broadly welcome the proposed changes to the STD. They are targeted at the most flagrant existing abuses of the STD. They are pragmatic.

We accept that at this stage it would be difficult to extend the STD to all legal persons and to all forms of capital income. That said, a commitment to do so in the future would seem to be an important part of the process of reform and should therefore be included in the revised STD.

The current STD includes a transitional arrangement applicable in some participating jurisdictions allowing tax to be withheld from interest payments made to recipients to whom the STD applies and who do not wish to exchange information on the income earned with their country of residence. It is apparent that this facility has allowed continuing evasion of tax by some of those exercising this option to refuse the exchange of information. Transitional arrangements should always come to an end and we would encourage the Commission to publish a date on which this option will cease to be available so that full automatic information exchange will apply in every participating jurisdiction.

The proposed changes to include legal entities and arrangements (mainly trusts) in the scope of STD, to broaden the definition of interest income, to restrict the use of non-UCIT structures, to change the definition of 'paying agent on receipt' (PAOR), to consider certain structures as 'tax transparent' and to therefore treat them as agents for their beneficial owners and to positively identify those structures that will be treated as PAORs and as tax transparent are all particularly welcomed.

All this being noted, we have significant concerns about some aspects of the proposed reform of the STD. These particularly relate to Annexes 1 and 3 to the proposed STD. As currently drafted they are incomplete, failing to list all relevant jurisdictions and a significant number of entities that should be automatically considered as either PAORs or as tax transparent, and they create the possibility for significant political tension both prior to adoption of the proposed STD and after its implementation whilst providing ample opportunity for future tax avoidance and evasion, so undermining the objectives for which they were created. As a result we make suggestion in this report for additions to the list of jurisdictions to be covered, demonstrate the weaknesses in he drafting of Annex 3 and suggest an entirely different approach to defining entities to be considered tax transparent in Annex 1 which is likely to result in substantial enhancement in the effectiveness of the proposed STD.

We also note that the effectiveness of many of the arrangements proposed are dependent upon the anti-money laundering (AML) 'know your client' (KYC) procedures used to determine the residence of the beneficial owners of entities and arrangements now to be included within the scope of the STD. We have doubt about the reliability of those AML KYC procedures when used for this purpose. This is because the risk based approach to KYC rules permitted by the 3rd European Money Laundering Directive and under Financial Action Task Force rules has resulted in some jurisdictions considering the opening of some interest bearing deposit accounts as a transaction carrying low risk, for which purpose only a single document KYC identification process is required. When a passport is used for this purpose the regulated organisation that might for STD purposes become either an upstream economic entity or a paying agent may hold insufficient information to determine the place of residence of the taxpayer to whom a payment is made, so undermining a critical element of the STD. For this reason we recommend a revision to the rules on client identification to be used by paying agents for STD purposes to avoid doubt arising.

Finally, whilst noting that it was not the intention to extend the STD to all capital income, it is clear that some extension of the definition of interest to include a broader range of life assurance products, annuities, swaps and some pensions may have been helpful and if none can be included in this version of the STD then we recommend that extension to these types of income must be indicated as areas for future attention as part of a programme of ongoing work of revision of the STD.

I am aware that that is a little technical. I will blog separately, and hopefully later today, about just why we think some of the changes proposed are so useful.

What was interesting at the session though was this: there is a clear left / right divide on this issue. More important, there is a clear division between states on this issue. Luxembourg is obviously going to be a major impediment to progress: an MEP present made that clear.

And perhaps as clear is the obfuscation of bankers on this issue. To claim, as a representative of the European Banking Federation did during the session, that the investment in new systems to identify the beneficial owners of offshore structures would impose substantial cost upon banks is absolutely absurd. I assured the parliament that in practice the banks do know precisely who they act for: it is the warm body at the end of the telephone who issues them with instructions. In addition, if they have any doubt about the fact that the person in question is not the real beneficial owner, and does not know who that real owner is, then they are already required to make sure that they can see through that person to the real warm body who is issuing instructions or they break the law. To therefore say that identifying the real owners of offshore structures imposes a real cost on bankers in the EU and affiliated states is a simple admission that they are not doing their jobs properly at present.

As I've already noted, the tax havens refused to speak at this session. The bankers evidence was poor. The evidence from tax authorities, from Transparency International and from myself was much more compelling to the audience of MEPs. Let's hope that that is an indicator of potential progress.