Last week in Luxembourg, EU Finance Ministers reached an agreement on the savings tax directive after nearly 14 years of deadlock. The accord is aimed at stamping out cross border tax evasion – and preventing money laundering and fraud.

Reports coming out of Europe say that now that the EU has agreed to tax interest earned by its citizens outside their homeland, *”tax dodgers seeking to flee domestic revenue offices by investing abroad will be running into closed doors.”*

The agreement, which becomes law in 2005, requires 12 EU member states to exchange information about non-residents’ savings, so they could be taxed accordingly. The Directive was agreed to in January originally, but final acceptance of the deal was postponed after Italy linked passage of the bill to raising the EU production quota for its dairy farmers. It was only after the EU Finance Ministers withdrew objections to its request to defer payment of penalties for over production of milk that Italy gave consent to the procedure for exchanging information on foreign savings accounts.

EU Finance Ministers hailed the deal as a triumph, and current EU President and Chairman of the EU Finance Meeting, Greek Finance Minister Kikos Christodoulakis, described the agreement as *”a decisive breakthrough after 14 years.”* Germany’s Deputy Finance Minister, Caio Koch-Weser, also applauded the EU agreement saying, *”The first step on the way to a European tax on interest is a success.”*

Financial institutions in European offshore territories – including the Channel Islands and the United Kingdom’s Caribbean dependencies – also will be required to comply.

**Withholding Tax**

Member states Luxembourg, Austria and Belgium are excused from the EU agreement on disclosure, planning instead to levy a general withholding tax starting at 15 percent on interest earned on foreign investors’ savings beginning in 2005. Expectations are that the tax will then be raised to 20 percent in 2008 and 35 percent in 2011, with three-quarters of the tax revenue transferred to tax authorities in the investors’ home country.

Gordon Brown, Chancellor of the Exchequer had opposed extending the withholding tax to the United Kingdom, which preferred a solution based on exchange of information. Mr Brown is of the opinion that a withholding tax would jeopardise London’s position as Europe’s main financial centre and hurt the London-based bond market.

**Switzerland**

The three member states were following Switzerland, which repeatedly has refused to comply with banking disclosure standards and has offered to pay the EU 75 percent of returns generated from a withholding tax in exchange for not having to reveal the identity of its investors.

Overseas account holders would be given the choice of declaring their assets in Switzerland or remaining anonymous and having 35 per cent of their savings income deducted from their accounts.

Swiss Finance Minister Kaspar Villiger reportedly has said he is ready to sign a deal on the taxation of savings with the European Union, provided speedy agreement is reached on other issues – and he does expect a quick conclusion to a second round of bilateral negotiations with the EU.

The offer the Swiss have made to the European Union involves Switzerland transferring a levy on EU citizens’ investment income to Brussels; however, Switzerland will not provide information about account holders without their consent. It is anticipated that the deal will cost Swiss banks hundreds of millions of francs to upgrade their computer systems in order to comply with new rules.

A spokesman for the Swiss Bankers Association said it was basically happy with the EU deal, indicating that financial privacy is fully preserved.

Non-EU member states in Europe, such as Liechtenstein, Andorra, Monaco and San Marino, also are required to levy a tax on EU citizens’ savings and pay three-quarters of it to the home country. The inclusion of Switzerland and other non-EU states in the deal was a stipulation for securing the approval of Luxembourg, Austria and Belgium. Reportedly, the United States has pledged to exchange information when requested by EU countries.

**Level Playing Field**

In the past, the Organisation for Economic Co-operation and Development (OECD) has criticised the EU Directive, believing it could hamper its efforts on harmful tax competition.

Meanwhile, the International Trade and Investment Organisation (ITIO) also has said the OECD’s “harmful tax competition” project appears compromised. According to the ITIO, the implementation of the savings tax directive may violate the OECD’s commitment to a level playing field, while also presenting a major challenge to the OECD’s own principles of transparency and exchange of information. The directive effectively favours four OECD member states over non-OECD countries by allowing them to defer exchanging information until 2011 or later.

The ITIO has been pressing for a meeting of the Global Forum to discuss this and other issues.