TAXATION OF SAVINGS INCOME
(22700)
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COM(01) 400
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Draft Directive to ensure effective taxation of savings income in the form of interest payments within the Community.
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| Legal base: | Article 94 EC; consultation; unanimity
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| Document originated: | 18 July 2001
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| Deposited in Parliament | 2 October 2001
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| Department: | Inland Revenue
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| Basis of consideration: | EM of 10 October 2001
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| 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)
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| To be discussed in Council: | For formal adoption by end of 2002
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| Committee's assessment: | Politically important
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| Committee's decision: | Cleared, but request to be kept informed
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Background
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.
Conclusion
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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