European stalemate over savings tax

Abstract

The implementation of the EU's savings tax project looks as far away as ever after October meetings between the Commission and the Swiss Ministry of Finance were unsuccessful. The Commission is battling to bring in the directive by the end of the year but the initiative has stalled because several member states have said that they will withdraw from the project unless third-party countries, including Switzerland, agree to equivalent measures. Failing to secure an agreement over the savings tax directive means that the other measures in the so-called Monti package will also fall by the wayside. These additional measures are a draft directive on cross-border royalties and withholding tax and a code of conduct for business taxation.

News analysis

The implementation of the EU's savings tax project looks as far away as ever after October meetings between the Commission and the Swiss Ministry of Finance were unsuccessful. The Commission is battling to bring in the directive by the end of this year but the initiative has stalled because several member states have said that they will withdraw from the project unless third-party countries, including Switzerland, agree to equivalent measures.

Failing to secure an agreement over the savings tax directive means that the other measures in the so-called Monti package will also fall by the wayside. These additional measures are a draft directive on cross-border royalties and withholding tax and a code of conduct for business taxation.

Peter Cussons, a tax partner with PricewaterhouseCoopers, believes that the Monti package is the cornerstone of the Commission's tax policy and that failing to agree the directive by December will mean a serious loss of face for the Commission. He explains: "All they've really achieved so far is the parent-subsidiary directive and the arbitration directive which has been suspended. This is the next big thing. I don't think December 31 is do-able now but if you set a series of deadlines and miss them then the project loses weight."

The problem lies with the controversial exchange of information clause in the savings directive. The directive aims at ensuring effective taxation of interest income from the cross-border investment of savings paid to individuals within the EU. Under the proposed directive there must be a full exchange of information on interest paid from one member state to individual savers resident in other member states. Austria, Belgium and Luxembourg will apply a withholding tax for several years before moving to exchange of information.

Switzerland, while not part of the EU, is under pressure to commit because the EU wants to ensure that it does not lose revenues to residents moving their savings to non-EU countries such as Switzerland and the US. The EU also needs the US, Andorra, Monaco, Liechtenstein and San Marino to commit to equivalent measures in order to keep the support of member states such as Austria and Luxembourg. The issue for Switzerland is that banking secrecy is almost sacred in the country and is protected by law.

Discussions between the EU's internal market commissioner, Frits Bolkestein, and Switzerland took place in Luxembourg in early October and so far the EU has been unable to get Switzerland to change its stance. Instead, the Swiss have proposed charging a withholding tax and passing the revenues on to the relevant member state authorities. EU foreign ministers are getting increasingly frustrated with the gridlock and some are calling for sanctions to be applied to Switzerland if it continues refusing to back-down.

According to reports in the Swiss and UK press, finance ministers discussed the possible form of sanctions. These include suspending negotiations on bilateral agreements with the EU and banning Swiss banks from carrying out certain activities within the EU.

Bolkestein himself has shown his frustration with the Swiss position in a commentary piece in the UK Financial Times on October 7. He expanded on his September statement that asking Switzerland to ensure EU citizens pay their taxes was `the most normal thing in the world'. He wrote: "I find it difficult to believe that the Swiss government is hesitating to help its EU neighbours to uphold their own laws including fiscal ones."

But despite the pressure, Swiss president Kaspar Villiger has made it clear that he believes the country has conceded enough to the EU by offering to apply a withholding tax and to exchange information on tax fraud cases or on specific occasions when asked. He has said that Swiss law guarantees privacy but that it is waived when terrorism or crime is involved.

James Nason, the spokesman for the Swiss Bankers' Association angrily puts across the banking view on the matter. Stressing that Switzerland has committed no crime and violated no treaty he said: "We find any talk of sanctions out of place. Switzerland has done nothing wrong - the EU is spinning out of control. It's incredible. The EU is trying to ram legislation down the throat of a non-member."

And he, like others, finds it ridiculous that all the attention is being put on Switzerland, despite the fact that none of the other non-EU countries have committed to exchange of information. In fact, the US government has actively said that it will not agree to a blanket exchange of information.

In the short term at least it looks like the project is stuck. Some countries such as the UK and Germany are calling for hard-line action to be taken against Switzerland while others, including Luxembourg and Austria, have made it clear that they would not support sanctions. Bolkestein has expressed concern that some countries are deliberately trying to scupper the project. In his commentary he said: "Some of those calling for the strongest possible measures to fight the evasion of savings tax are doing so in the hope that by setting the standards unrealistically high they will wreck the whole enterprise."

But despite the seemingly impossible task ahead and the lack of results so far, it is possible that the Commission's grim determination to see the Savings Tax Directive and the Monti-package succeed will help them towards a compromise. Adam Craig, a tax partner with Deloitte & Touche in London, said: "There are many obstacles but never underestimate the ability of the EU to find a compromise."