The European Union first adopted a draft Directive on the taxation of savings back in June 2000, at a meeting of EU Finance Ministers. This was refined in November 2000, with a revised draft being released in the summer of 2001. The European Council hopes to reach a common position on the Savings Directive by the end of this year.


The prelude to this initiative was a 1997 Tax Package based on the need for co-ordinated action to tackle “harmful” tax competition, around the same time as the OECD initiative was being developed. In 1998, a “co-existence” model was put forth, requiring each Member State to either operate a withholding tax or provide information on savings income to other Member States, or operate both systems.

As the provisions of such a Directive were to take into account the need to preserve the competitiveness of European financial markets on a global scale, it was also agreed that Member States would undertake to promote the establishment of equivalent measures in third countries, and to commit themselves to ensuring, within the framework of their constitutional arrangements, that equivalent measures were applied in their dependent and associated territories.

The revised approach tabled in July, 2001 includes:

-the dropping of “coexistence”

-automatic exchange of information

-a transitional period of seven years for Member States that wish to continue to apply a withholding tax for the time being

-promotion of equivalent measures in key third countries (Andorra, Liechtenstein, Monaco, San Marino, United States, Switzerland)

-promotion of “same” measures (ie automatic exchange of information) in dependent and associated territories, without the option of “equivalent” measures

##Dependent and Associated Territories##

The Member States of the EU feel that the draft Tax Package, although related to the EU Single Market, should include dependent territories and, in certain respects, key third countries. Without this support, it is felt that restrictive measures within the EU could lead to a “flight of capital across borders”.

ECOFIN (Council of Economics and Finance Ministers that coordinates economic policy in the EU) has said that by the end of 2002 it will need ‘sufficient assurance’ that dependent territories and third countries have committed to what has been sought of them, in order to be able to adopt the Directive, other things being equal.

The Channel Islands reportedly have found comfort in the fact that the EU is being forced – by its own members – to ensure there is a level playing field. Previously, Jersey had said that it would seek to ensure that it was not a place where EU residents could endeavour to circumvent the effect of the Directive, and this month advised the EU that it will support exchange of information in respect of EU residents. It confirmed that it would begin the necessary work to develop appropriate measures, on the basis of a level playing field. Guernsey’s Advisory & Finance Committee has confirmed that it is prepared to recommend an amendment of the Island’s legislation to apply the ‘same measures’ as EU Members in respect of automatic exchange of information on EU resident individuals’ savings interest from the date on which all EU Members apply such measures.

##Third Countries##

The US position appears to be that automatic information exchange is covered already by existing double taxation agreements with EU member states, although not provided for in a manner which fits with the approach adopted by the EU. Switzerland, on the other hand, maintains that it will not move to exchange of information, suggesting instead a withholding tax system on a “paying agent” basis.

In the United States, both Senators and House Representatives have written to US Treasury Secretary Paul O’Neill, urging rejection of the proposal on the grounds that it will undermine America’s competitive advantage in the global economy. America is a capital-inflow nation, in large part because its tax burden is much lower than the average tax burden in Europe say opponents to the measure, who also claim it would be *”bad for other nations as well”*. The lower tax burden reportedly has helped attract trillions of dollars to the US economy, creating jobs and boosting the financial markets. The creation of an international tax bureaucracy would serve only to create conflict between low-tax and high-tax nations, according to one such letter written by a Senate Banking Committee member.

In this latter connection, the Washington-based Centre for Freedom & Prosperity states that there are many strong arguments against the savings tax directive, which effectively *”would require financial institutions in low-tax nations to comply with the tax laws of high tax nations,”* according to President Andrew Quinlan.

There are other matters yet to be resolved, and this has been recognised by the Council. At the issuing of the last draft, it was described as a text for the purposes of negotiation with third countries. Further, any Member State can veto the Directive.

Although Belgium, Austria and Luxembourg have confirmed that they wish to retain a withholding tax approach for the agreed 7-year transitional period, they also have indicated that they may argue for an unlimited transitional period if it becomes clear that Switzerland will not move towards automatic information exchange.

##Time Table##

In addition to the savings proposal, the 1997 package of tax measures to combat harmful tax competition included two other measures. These were a Code of Conduct to eliminate harmful tax measures in the business taxation area (included in the December 1997 conclusions) and a proposal for a Directive to eliminate withholding taxes on interest and royalty payments between associated companies. Heads of State have instructed that there should be agreement on all three elements of the package by the end of 2002.

Effectively, it was agreed that during the second part of 2002 and no later than December 31, 2002, the Council will assess whether sufficient reassurances have been obtained with regard to the application of the same measures in all relevant dependent or associated territories (the Channel Islands, Isle of Man, and the dependent or associated territories in the Caribbean) and of equivalent measures in the named third countries. As far as the Code of Conduct is concerned, in this same time frame it will assess the implementation of measures and the results reached on the rollback of the harmful measures and on the possible extension of benefits for some of these measures beyond the end of 2005.

Should agreement be reached on the above assessments, and subject to the opinions of the European Parliament and the Economic and Social Committee – and by unanimity – there will be conclusion of the agreements with the third countries named in the Feira Conclusions; the adoption of the Directive on the taxation of savings; and adoption of the Directive on interest and royalty payments made between associated companies of different Member States.