36. DRAFT DIRECTIVE ON THE TAXATION
OF SAVINGS INCOME (8781/98)
Letter from Lord Tordoff, Chairman of
the Committee, to Mrs Dawn Primarolo MP, Financial Secretary,
Sub-Committee A (Economic and Financial Affairs,
Trade and External Relations) considered this proposal for the
first time at its meeting on 14 July. The Sub-Committee was concerned
that the Treasury's Explanatory Memorandum on this important proposal
is unhelpfully brief. It therefore agreed that I should write
to ask you for a detailed memorandum containing further information
on the following points:
(i) the effect of this proposal on the City,
and whether it would be likely to discourage investors;
(ii) HMG's stance on the details of the proposalthe
Explanatory Memorandum states (paragraph 7) that "work is
needed on the details of the draft Directive" without divulging
the Treasury's thinking on these details;
(iii) whilst noting that the proposal is
made under Article 100 (and therefore requires unanimity), what
is the attitude of other Member States, including Austria and
Luxembourg, to the proposal.
It would also be helpful to know the Government's
timetable for the discussions which it is currently holding with
interested parties, and when the "fuller assessment"
referred to in paragraph 9 of the Explanatory Memorandum is likely
to be published.
If time allows, the Sub-Committee has indicated
that it may think it appropriate to take evidence on this proposal,
and on fiscal harmonisation generally, later in the year. It has
therefore also asked me to ask you to keep the Committee informed
of any other EU taxation proposals which are due to be published.
The Sub-Committee wishes to maintain the scrutiny
reserve for the time being.
15 July 1998
Letter from Dawn Primarolo, Financial
Secretary to the Treasury, to Lord Tordoff, Chairman of the Committee
Thank you for your letter of 15 July asking
for further information about the European Commission's draft
Directive on the taxation of savings. Since discussions in the
Community on this proposal are still at an early stage, and our
own research into the likely implications of the proposal is not
complete, the amount of extra information I can give at present
is necessarily limited. However, I thought the Committee would
appreciate a response before the recess.
I have annexed to this letter a note setting
out our understanding, article by article of how the Directive
as drafted would work. I hope the Committee will find this helpful.
The Committee asks about the effect of the proposal
on the City. As you know, many City institutions have expressed
grave concerns about the effect which the directive might have
on the financial markets, in particular on Eurobonds for which
London is the leading centre. My officials are in close touch
with a representative group of interested bodies in the City,
and a series of meetings and much research work have already taken
place. The aim of these discussions is to identify exactly which
sections of the market would be most likely to be affected and
to what extent. It is essential that whatever stance the Government
takes in the forthcoming discussions in Europe can be supported
by firm evidence. However, it is as yet too early for me to say
what the outcome of the research will be. We hope to be able to
use it to develop our position, as well as provide a fuller formal
assessment of the business impact of the proposals, by the autumn.
Our stance on the detail of the proposed Directive
does, of course, also depend to some extent on the outcome of
our discussions with the financial sector. However, we have already
said that in our view exchange of information about interest payments
between Member States is preferable in principle to the coexistence
model proposed in the draft Directive. The Directive as drafted
is technically defective in a number of ways, and much work will
be needed to get it into a workable form. Areas of concern are
likely to include the scope of the Directive, the definition of
interest, the "paying agent principle", under which
the obligation to withhold or provide information attaches to
the last paying agent in the chain, and the interaction of the
Directive with double taxation agreements.
The Committee also asks about the attitude of
other Member States. Discussions at European level are only just
beginning, but the evidence so far is that most Member States
are broadly in favour of the proposals in principle, though many
have reservations about the detail and not all are unambiguously
in favour of the coexistence model (which has been devised as
a system which would have some chance of being acceptable to those
States which retain strict banking secrecy laws which would not
allow them to exchange information about investors' holdings).
The Austrian presidency has signalled its desire to make progress
on the issue, and we expect the momentum to be maintained under
their German successors. Many states, including Luxembourg, have
indicated that they will want to raise a number of technical points
on the proposal. There seems to be a general recognition of the
need to avoid risking a flight of capital outside the Community,
but most States also feel that it should be possible to find a
balanced solution which is reasonably effective against tax evasion
while avoiding serious damage to the financial markets. That will
be one of the many issues for discussion in the months to come.
Undertakings to consider Directives on Taxation
of Savings and on Interest and Royalties (COM(98)67) comprise
two of the three parts of the EU package on tackling harmful tax
competition which was agreed by the Ecofin Council on 1 December
1997. The third was the Code of Conduct for business taxation.
It may be helpful to let you know what progress has been made
on that front.
You will recall that the Code of Conduct is
a non-legally-binding agreement whereby Member States committed
themselves not to introduce new tax measures which are harmful
within the meaning of the Code, and to re-examine existing laws
and practices with a view to eliminating any harmful measures.
A Code of Conduct Group, which I chair, has been set up. It comprises
representatives from each Member State and from the Commission.
It will review measures which are potentially harmful within the
meaning of the Code.
The Group has met twice and has agreed an ambitious
work programme which includes a provisional report to Ecofin in
December 1998, a further report in Summer 1999, and a full report
by the end of that year. The Commission has drawn up a list of
potentially harmful tax measures for the Group's consideration.
It is an initial list which will be refined and added to over
The process of assessing whether potentially
harmful measures on the list are considered actually harmful will
be started by two sub-groups which will start work in the Autumn
and report back to the main Group. The output from the Group will
consist of reports to Ecofin which will reflect the full range
of views within the Group. The Ecofin Council will decide whether
the Group's reports are published.
I enclose a copy of a Press Statement issued
after the latest meeting of the Group on 16 July.
24 July 1998
CODE OF CONDUCT
(BUSINESS TAXATION) GROUP, 16 JULY 1998
At the end of the meeting of the Code of Conduct
(Business Taxation) Group, held today in Brussels, the Chairwoman
of the Group, Dawn Primarolo, UK Financial Secretary to the Treasury,
"The Code of Conduct Group (Business Taxation)
met for the second time today. It was a useful meeting at which
member states reaffirmed their commitment to the principles of
the Code we agreed last December.
We discussed our work programme and set a timetable
to enable us to present our initial report to ECOFIN in December.
Our next meeting will be in October.
We noted that the initial indicative list of
potentially harmful business tax measures which might fall under
the scope of the code of conduct for business taxation. This list
was compiled by the Commission on the basis of information provided
by member states and information based on earlier discussions
in the tax policy group, as well as publicly available information.
The Group emphasised that the list was not exhaustive,
and that inclusion of a measure on the list did not necessarily
mean that it was, in fact, harmful.
We have decided to evaluate measures category
by category on a cross-country basis. We agreed today to divide
the measures into five categories: intra-group regimes, financial
and off-shore companies, other sector-specific regimes, regional
incentives, and other measures.
We decided to establish two sub-groups which
will undertake an initial examination of measures related to intra-group
regimes, and the financial and off-shore companies respectively.
The three other categories will be examined subsequently. I will
chair the first and Mr Nolz, Director-General of the Austrian
Ministry of Finances, will chair the second subgroup".
NOTE ON THE DRAFT DIRECTIVE ON TAXATION OF SAVINGS
Summary of explanatory memorandum
1. Paragraphs 1-4 set the draft in the context
of the wider package announced in November last year to tackle
harmful tax competition. They make it clear that this Directive
is intended to further all three objectives of the package (reducing
distortions in the internal market, preventing loss of tax revenue
and hence rebalancing tax structures so as to reduce taxes on
employment) by countering evasion of tax on savings. It is noted
also (Paragraph 3) that the start of the single currency makes
achieving this objective more urgent.
2. Paragraphs 5-11 discuss the "coexistence"
model, explaining that giving Member States a choice between two
options is seen as increasing the chances of the Directive's adoption
(ie States with strict banking secrecy laws would be able to opt
for withholding, but information exchange provisions already in
place could be continued or extended). Individuals resident in
States opting for withholding would be able to avoid withholding,
without compromising banking secrecy, via the certification procedure
provided for by Article 9.
3. Paragraphs 9-10 discusses the choice
of a rate for withholding, explaining the tension between the
need to achieve the objective of the Directive (to ensure a minimum
of effective taxation) and the need to avoid causing a capital
flight by setting too high a rate.
4. Paragraph 11 says that it is possible
for the beneficial owner to ensure that he is taxed exclusively
in the State where he is resident by providing a certificate issued
by his own tax authority to the paying agent, who would then not
have to withhold tax.
5. Paragraphs 12-14 discuss the "paying
agent principle", explaining that the paying agent is in
practice best placed to implement the Directive's requirements.
It points out that this has the effect of including payments from
debtors outside the EC (if they make them via an EC paying agent),
and says that this mitigates the effect on EC borrowers in comparison
with borrowers outside the EC.
6. Paragraph 14 says that the impact on
the Eurobond market is thought to be limited by:
the "paying agent principle"
(and in particular the fact that an issuer resident in the EC
is not placed at a disadvantage in comparison with an issuer outside
restriction of the Directive to individual
recipients within the EC (because, it is thought, most investors
in Eurobonds are either companies or individuals outside the EC).
7. Paragraph 15 discusses the need for wider
international measures. It proposes that the Community should
negotiate with its commercial partners to achieve this, and requires
Member States, so far as it is constitutionally in their power,
to ensure that equivalent provisions are applied in their dependent
territories to the extent that these do not fall directly within
the Directive's scope (for us, only Gibraltar is directly covered).
Sets out the aim of the Directive, providing
that Member States are to take the "necessary" measures
to ensure a minimum of tax on interest payments going to individuals
resident in other Member States. Paragraph 2 introduces the "paying
agent principle", making MSs responsible for ensuring that
paying agents established in their country comply with the obligations
imposed by the Directive. It specifies that the place of establishment
of the debtor itself is to be disregarded for this purpose.
Sets out the "coexistence model".
Paragraph 1 provides that Member States are to operate either
the "information system" or the "withholding tax
system" (both described in later articles). The intention
of paragraph 2 is that Member States should have to adopt either
one system or the other for all relevant payments.
Defines the terms "beneficial owner",
"paying agent", "residence for tax purposes"
and "competent authority" for the purposes of the Directive.
The "beneficial owner" is defined
as the person (who must be an individual not a company) who receives
the payment "for his own benefit".
The "paying agent" means, for the
purpose of the Directive, the last link in the payment chain.
Thus, if the payment to the beneficial owner is made directly
by the debtor, the latter is the paying agent. Or, if the payment
passes through one or more intermediaries, the last one is the
paying agent. This is the case even if the last intermediary was
appointed by the beneficial owner himself, so that for the purpose
of the Directive the term "paying agent" includes what
we would call collecting agents.
"Residence for tax purposes" This
term is used in the Directive for establishing which "beneficial
owners" are to be covered. The beneficial owner is to be
deemed resident in the Member State:
where he has his permanent home;
if he has a permanent home in more
than one Member State, in the one which is his "centre of
vital interest" (described as the one "with which his
economic and personal links are closest");
if neither of these work, where he
if he usually resides in no or several
Member States, in the Member State of his nationality.
If none of the above work to establish residence,
the Member States concerned are to agree "within a reasonable
period of time" where the beneficial owner is to be deemed
to be resident. This structure follows the standard "tie-breaker"
tests used under double taxation conventions to decide questions
of residence as between two States.
The term "competent authority" is
used in Article 7 (the authorities who are to transmit/receive
information where the information system is chosen) and in Article
8 (authorities who are to provide certificates authorising gross
payment where the withholding tax system is chosen). The definitions
used are in the Mutual Assistance Directive, for Britain: "The
Commissioners of Inland Revenue or an authorised representative".
Requires Member States to adopt whatever procedures
are necessary to allow the paying agent to identify the beneficial
owner and his residence, using the definitions in Article 3. The
paying agent needs to be able to do this to allow him to ascertain
whether the Directive is applicable to the payment and, if the
information system is being operated, to pass the information
to the authorities to allow them to pass it on to the recipient's
This defines "interest" for the purposes
of the directive. The four categories listed are, broadly:
increase in value of debts;
income from collective investments
vehicles investing in securities;
increase in value of units in the
This article defines the territorial scope of
the draft Directive. It is to apply only to payments by paying
agents (as defined) which are "established within" the
Describes the "information system"
option. Where this is chosen, the paying agent's Member State
must convey (automatically, ie without being asked) to the beneficial
owner's Member State the information which is "necessary
to establish the amount of the beneficial owner's tax liability".
Paragraph 2 sets out the minimum which must be given: amount,
date of payment, identity and declared residence of beneficial
owner. The information would have to be provided within 6 months
of the end of the calendar year during which payment was made.
Describes the withholding tax system option.
Where this was chosen, tax would have to be withheld at a minimum
20 per cent, except where the recipient produced a certificate
with details of the payment issued by the relevant authorities
of his Member State (in which case tax would only be withheld
from any uncertificated amount). This article needs to be read
in conjunction with Article 10 which sets out how the taxed payment
would have to be dealt with in the recipient's State.
Sets out the certification procedure for the
purpose of Article 8. For withholding to be avoided, the recipient's
Member State must issue a certificate within two months on request
by the recipient, showing the beneficial owner's identity, the
paying agent's identity and the amount and date of the payment.
This Article contains the main measures to deal
with the consequentials of withholding tax ie accounting for it
in the recipient Member State and avoiding double taxation. Paragraph
1 states, in a general way, that Member States are to take the
"necessary measures" to eliminate double taxation on
income covered by the Directive. Paragraph 2 provides for the
recipient's State to give a tax credit corresponding to the tax
withheld at source. If the credit exceeds the tax due in the recipient's
State, the excess is repayable by the State which withheld tax
from the payment. The aim of paragraph 3 is to make similar provision
to ensure that credit is also given for underlying tax on collective
investment vehicles covered by the Directive. And Paragraph 4,
dealing with payments originating outside the EU, provides for
withholding tax under the Directive to be reduced by any non-refundable
tax which has already been withheld before the payment reaches
the paying agent's Member State.
Provides for the Community to negotiate with
its "main third country commercial partners" to ensure
effective taxation of income which comes via paying agents outside
Gives a timetable for the Directive. It is to
be adopted and published by Member States by 1 January 2000, and
applied by 1 January 2001.
Provides for the Commission to review the operation
of the Directive and report to the Council on it by1 January 2004.
Provides for the entry into force of the Directive
(20 days after publication in the Official Journal of the European
Addresses the Directive to the Member States.
Letter from Lord Tordoff, Chairman of
the Committee, to Dawn Primarolo MP, Financial Secretary, HM Treasury
Thank you for your helpful and informative letter
of 24 July giving further information about this draft Directive,
which was considered by Sub-Committee A (Economic and Financial
Affairs, Trade and External Relations) at its meeting on 10 November.
The Sub-Committee is still considering whether to take evidence
on this proposal, and on fiscal harmonisation generally, and therefore
wishes to maintain the scrutiny reserve for the time being.
15 July 1998