Select Committee on European Scrutiny Fourteenth Report



COM(01) 400

Draft Directive to ensure effective taxation of savings income in the form of interest payments within the Community.

Legal base:Article 94 EC; consultation; unanimity
Document originated:18 July 2001
Deposited in Parliament2 October 2001
Department:Inland Revenue
Basis of consideration:EM of 10 October 2001
Previous Committee Report:None; but see (19196): HC 34­xvi (1998-99), paragraph 1 (21 April 1999); HC 34­xxviii (1998-99), paragraph 3 (20 October 1999)
To be discussed in Council:For formal adoption by end of 2002
Committee's assessment:Politically important
Committee's decision:Cleared, but request to be kept informed


  9.1  In October 1999,[29] the previous Committee recommended for debate a number of documents relating to harmful tax competition, including a draft Savings Directive.[30] The stated aim of that Directive was to ensure a minimum of effective taxation of savings income. Under the proposal, Member States were given the option either of imposing a withholding tax on cross-border interest payments made to individuals, or of exchanging information (the "coexistence model"). The proposal was especially controversial in the UK because, although aimed at individuals, it was argued that it would have the unintended effect of threatening some financial markets, especially the international bond market based in the City of London. It was feared that, if applied, the Directive would cause the Eurobond market to relocate off-shore to financial centres not applying the withholding tax. The UK Government resisted the measure and announced that it would not hesitate to veto any proposal that damaged the competitiveness of British financial markets.

  9.2  As a way of reaching agreement, Member States eventually agreed that the substantive content of any Directives on harmful tax competition would only be formally adopted if sufficient reassurances were received from key third countries and relevant dependent territories of Member States that they too would adopt the same or similar measures.[31]

The document

  9.3  The Commission is now proposing an amended draft Directive on savings based on the agreement reached by Heads of State and by Finance Ministers in 2000 on the best means of ensuring the taxation of savings income within the European Union.[32]

  9.4  The aim of the document is to ensure effective taxation of cross­border interest payments to individuals within the European Union by means of the exchange of information on cross-border interest payments, on as wide an international basis as possible. Under the proposal, which replaces the 1998 draft Directive on savings, each Member State would ultimately be expected to provide information to other Member States on interest paid from that Member State to individual savers resident in other Member States. In practice, there will be an obligation on a paying agent within an EU Member State whenever interest payments are paid to an individual resident in another EU Member State or an individual redeems an interest­bearing security in another Member State. The information will be sent to the paying agent's domestic tax authority for onward transmission to the tax authority in the Member State of residence.

  9.5  However, for a transitional period of seven years, Belgium, Luxembourg and Austria would be allowed to apply a withholding tax instead of providing information, at a rate of 15% for the first three years and 20% for the remainder of the period. The three Member States levying a withholding tax must also provide procedures to ensure that the beneficial owner may request that no tax be withheld. In addition, these Member States would be required to transfer 75 percent of the revenue from the withholding tax to the Member State of residence of the investor.

  9.6  In terms of scope, the proposal covers interest from savings of every kind, including bonds (but subject to a transitional arrangement for existing bonds).[33]

  9.7  The emphasis on exchange of information is seen as being more consistent with an international trend towards increased administrative co-operation and the exchange of information between tax administrations. The new text is seen as a significant departure from the 1998 proposal, which offered Member States a choice between levying a withholding tax or providing information on interest payments to individuals resident in other Member States.

The Government's view

  9.8  In her Explanatory Memorandum of 10 October 2001, the Paymaster General (Dawn Primarolo) says:

"The draft Directive is fully in line with UK Government policies on combatting international tax evasion and on information sharing in order to strengthen the single market. The Directive is also consistent with the need recognised in the OECD, FATF [Financial Action Task Force on Money Laundering] and other international fora to ensure banking systems are not used to hide illegal income, profits or gains.

"While the proposed information exchange system clearly avoids the damage that would be done to the competitiveness of financial markets by the imposition of new withholding taxes, the Government believes that some fine tuning of the proposals is necessary to avoid unnecessary burdens on paying agents. The Government is committed to ensuring that, as far as possible, any final agreement and its implementation into UK law does not adversely affect the competitiveness of the UK financial sector."

  9.9  The Minister says that the legislative framework is already in place in the UK for the collection of such information and its onward transmission to countries with which the UK agrees reciprocal arrangements.


  9.10  The new proposal is seen by the Commission as forming part of a package of measures to tackle harmful tax competition in the European Union. We note that the new proposal, like the 1998 savings proposal, relies on the co­operation of market operators which make interest payments directly. The Commission says that "every effort has been made to keep their compliance costs to a minimum". However, we note the Minister's comment that she would like to see some further fine-tuning of the Directive in order to avoid unnecessary burdens on paying agents. We understand that this fine-tuning relates to some further simplification of the rules.

  9.11  We clear the document, but request to be kept informed, especially on progress in avoiding unnecessary burdens being placed on paying agents.

29  (19196); see headnote to this paragraph. Back

30  The debate was held on 25 November 1999. Back

31  The third-party countries included the United States, Switzerland, Liechtenstein, Monaco, Andorra, and San Marino. The territories included the Channel Islands, Isle of Man, and the dependent or associated territories in the Caribbean.  Back

32  Reached by Heads of State at the Santa Maria da Feira European Council in June 2000 and by Finance Ministers in November 2000. Back

33  In the case of bond issues, a "grandfathering clause" is included in the proposal to avoid market disruption. The grandfathering clause ensures the exemption of bonds and other negotiable debt securities issued before 1 March 2001 from the scope of the Directive for the duration of the transitional period.  Back

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