Loopholes in the EU Savings Tax Directive

The main aim of the EU Savings Tax Directive1 (ESTD), which became applicable on 1 July 2005, is to permit the EU Member State of residence of individu- als to tax their savings income in the form of interest payments they obtain from foreign payers (located within the EU or any of the states or territories that apply equivalent measures). This goal is achieved by a system of automatic exchange of information although, during a transitional period, some EU Member States (Belgium, Austria and Luxembourg) and dependent territories apply a withholding tax, which ensures at least a minimum level of taxation of the interest derived by EU residents (third countries apply “equivalent” measures that do not necessarily involve a switch from withholding to exchange of information). The first data published on the effects of the ESTD package reveals that it may not be working as expected. In the first six months of the ESTD’s operation, it seems that Swiss institutions withheld about EUR 100 million corresponding to the savings that EU residents have in Switzerland, a figure that hardly reflects that Switzerland is the world’s largest private banking centre and that about 35% of the world’s private wealth is placed in Swiss banks or financial institutions.2 Other countries and territories where the ESTD package applies also reported low withholding tax revenues: Luxembourg, EUR 48 million; Belgium, EUR 9.7 million; Guernsey, EUR 4.5 million; and Liechtenstein, EUR 2.5 million.3 Taking the example of Jersey, one source reports that the tax authorities have collected GBP 13 million, which would corre- spond to underlying deposits of GBP 3.5 billion earn- ing interest at 5%. Since Jersey’s assets are nearly GBP 350 billion, only a small fraction of savings has been caught by the agreements between Jersey and the EU Member States.4The low withholding tax revenues reported for the first six months of the ESTD package show that investors have either fled to other locations where the ESTD package does not apply (e.g. Dubai, Hong Kong, Singapore or even Uruguay) or have rearranged their busi- ness so as to avoid being caught by the ESTD package (by e.g. setting up companies or foundations in jurisdictions like Panama or Liechtenstein). Since it seems that, for the time being, there has not been a massive flow of deposits to other locations, the figures on with- holding tax revenues indicated above suggest that re- arranging business has been the preferred option. This is probably because the ESTD has important flaws that easily enable investors to avoid it. Despite the fact that, as the first data suggests, the effects of the ESTD package may have been overestimated, its adoption and application were a major political breakthrough for the EU. Until it received the green light from the Council, negotiations on the ESTD and its accompanying agree- ments were an uphill task; therefore, it is understandable that the EU institutions preferred to have a flawed instrument rather than no instrument at all. Now that the ESTD is in force, it is time to think about closing its multiple loopholes (in fact, under Art. 18 ESTD, the EU Commission must report every three years on the ESTD’s operation and propose to the Council any amendments that are necessary to ensure its main aims). This article does not study the ESTD or the national legislation implementing it in detail.