In essence the key change is a simple one but extraordinarily important. The directive that was introduced on the 1 July 2005 was exceptionally easy to avoid because it only applied to payments to individuals. As a result anybody who transferred the sums they held on deposit into either a company or trust immediately avoided the disclosure or tax withholding obligations that the Directive created. As a consequence we know that some Swiss banks were bulk buying up to 10,000 Panama companies at a time, for example. Unsurprisingly less information was exchanged than expected and yields were lower than expected.
The Commission is proposing to change all that. Under the proposed reforms legal entities (that is companies, corporations, limited liability partnerships, foundations and the like) all come within the scope of the EU STD, as do what are called 'arrangements' -which is a euphemism for all forms of trusts.
The practical consequence is this. If payment is made to a legal entity or arrangement within an EU country which is not taxed upon the receipt of interest then it is deemed to be a 'paying agent on receipt' with regards to its beneficial owners and has to either exchange information on the receipt with the country in which they are resident or account for tax at the withholding rate at the time of receipt if they are located in one of the European countries where withholding applies. This has the impact of making all trusts within Europe taxable on interest income. It also make sure that foreign investment income of legal entities is subject to tax within Europe.
For those 15 places that are covered by EU STD but which are outside the European Union, most of which a British Crown Dependencies and Overseas Territories, the impact is even more radical. In these locations the paying agent of the interest, which will normally mean the bank making payment, is required to ' look through' the company, corporation, foundation or trust that is recorded as the legal owner of the account to which the interest is paid and treat the interest as having been paid to the beneficial owner of that organisation using information held on their files for anti-money-laundering purposes to identify the real human person who benefits from the artificial structure created in the tax haven location.
Of course there are some minor issues that arise as a result, for example with regard to discretionary trusts, where the settlor is quite reasonably deemed to be the beneficial owner during their lifetime, but where complications arise after they have died, but these are relatively minor. And the important message is blunt, direct and clearly comprehensible, and it is that the European Union is saying that offshore structures cannot be used to hide the beneficial ownership of assets for the purposes of tax evasion.
Of course there is some negotiation required before this amendment can come into force but a line has been drawn in the sand: offshore tax abuse is now clearly indicated to be unacceptable. The consequence for the secrecy jurisdictions is unambiguous. Given that this reform will kill a substantial part of their business this is the time for them to accept that reform is essential, or face Armageddon.