COMMUNICATION FROM THE COMMISSION TO THE COUNCIL - REPORT CONCERNING NEGOTIATIONS WITH THIRD COUNTRIES ON TAXATION OF SAVINGS INCOME

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL - REPORT CONCERNING NEGOTIATIONS WITH THIRD COUNTRIES ON TAXATION OF SAVINGS INCOME : ECOFIN Council - 3 December 2002

Introduction

1. On 16th October 2001 the ECOFIN Council authorised the Commission to negotiate with the United States of America, Switzerland, Liechtenstein, Monaco, Andorra and San Marino appropriate agreements for securing the adoption by these countries of measures equivalent to those to be applied within the Community to ensure effective taxation of savings income in the form of interest payments.

2. Following the ECOFIN Council decision, the Commission wrote to the above third countries asking for negotiations to commence. However, it was only after the ECOFIN Council's approval of a text of the draft Directive at its meeting on 13th December 2001, that these negotiations could really begin. All the countries reacted to the Commission's request and a large number of meetings at both technical and political level have been held since. In accordance with the Council's mandate, these negotiations were conducted in close conjunction with the Spanish and Danish Presidencies. The Commission made regular oral progress reports of the negotiations to the ECOFIN Council.

3. This report summarises the results of the negotiations. It provides a factual account of the meetings held this year and lists the measures proposed by the third countries.

Switzerland

Development of negotiations

4. Despite having adopted its negotiating mandate on savings taxation on 30th January 2002, Switzerland refused to commence negotiations on savings taxation until the Council had adopted a series of negotiating mandates in other fields (the Schengen/Dublin agreements, free trade agreement of services and access to various Community programmes).

5. Following the adoption by the Council of these other mandates on 17th June, formal negotiations with Switzerland on savings income taxation finally commenced on 18th June 2002. Further negotiating meetings were held on 9th August 2002 (technical level), 3rd September 2002, 31st October 2002, 15th November 2002 and 20th November 2002. Subsequently on the 21st November 2002 a High Level meeting took place between Commissioner Bolkestein, Swiss President Villiger and Danish Finance Minister Pedersen.

6. At the opening negotiating meeting on 18th June 2002, the Commission delegation pressed the Swiss side to accept that they should apply automatic information exchange arrangements with the Community. The Swiss side indicated that their mandate did not cover negotiations on automatic information exchange and they did not envisage applying such a system either now or in the future unless they become members of the Community and as such directly subject to the Community "acquis".

7. The Swiss side stated that they wished to co-operate with the Community and it was in that spirit that they were prepared to consider a paying agent type withholding tax which they see more as a "retention tax" on behalf of the Community. This would apply to non-Swiss source interest (interest on debt issued in a country other than Switzerland but paid through a paying agent in Switzerland) paid to EU residents, as Swiss source interest would continue to be subject to Swiss withholding tax.

8. The Swiss would be prepared to model the system on the transitional arrangements that will apply within the Community up to the end of 2010. However they did not have a mandate to negotiate on the voluntary disclosure elements of the Community model. They would not apply rates lower than those foreseen in the directive during this period but would review the situation towards the end of the period. This review could lead to an increase or decrease in the rate based on their appreciation of the effectiveness of the Community system and its effects on investment.

9. The Swiss were also prepared to consider revenue sharing however the percentage to be passed to the Community would be subject to negotiation.

10. In relation to information exchange in general they said that they could consider some discussion but only in the context of exchanges of information on request relating specifically to tax fraud.

11. Finally the Swiss linked their proposal to a number of other issues. Firstly they wanted to see a balanced package in their negotiations taking into account the other subjects under negotiation. Secondly they wished to include in the discussions the application of the Parent Subsidiary Directive and the Interest and Royalties Directive, when it is adopted. Thirdly they wanted the Community to take action to encourage other third countries which could be potential competitors, such as Singapore and Hong Kong to adopt similar measures.

12. At a meeting between Mr. Bolkestein and Mr. Villiger on 3 July 2002, Mr. Villiger reiterated Switzerland's rejection of a solution based on automatic exchange of information and confirmed the Swiss position set out at the meeting on 18 June 2002.

The 4-point plan

13. At the negotiating meeting on 3rd September 2002, the Swiss provided a paper (that was circulated to the Council) outlining the main elements of their offer of a retention tax and demanding that the Community take up the issue of equivalent measures with other third countries (Hong Kong, Singapore, Canada, Japan, etc) as well as demanding that the parent/subsidiary directive should be extended to Switzerland.

14. The Commission however made it clear to the Swiss side that a simple retention tax would not be acceptable and that in order to arrive at an equivalent solution one must add to the idea of a withholding tax. In the light of Switzerland's clear and unequivocal refusal to accept automatic exchange of information, the Commission proposed to focus the discussion on a combination of four points:

(i) the withholding tax proposed by the Swiss,

(ii) provisions for voluntary disclosure by the beneficial owner,

(iii) the introduction of a genuine exchange of information on request and

(iv) a review clause to allow for the development of the arrangements after the end of the Directive's transitional period.

15. Mr. Bolkestein wrote to Mr. Villiger on 18th October 2002 setting out the four-point package and suggesting that anything less than this was unlikely to be considered acceptable. He particularly emphasised that genuine exchange of information on request was a pivotal part of the package as it would serve as an important deterrent against tax evasion.

Results

16. Discussions of the four-point package continued in October and November. The Swiss presented a text for a draft Agreement based on their offer of a retention tax which included, in return, a provision for Swiss enterprises to benefit from the parent-subsidiary and interest and royalties directives. There was however initially no mention of voluntary disclosure, information exchange on request or a review clause in this draft. The Commission informally suggested drafting elements for these other points and proposed drafting changes for the provisions on retention tax. These were discussed at the meetings in November.

17. The meetings in November made significant progress on defining and expanding the Swiss offer to cover elements of a review clause and voluntary disclosure as well as confirming a number of important technical issues in relation to the application of the retention tax, including the rate to be applied and the revenue sharing arrangements.

18. Despite detailed discussion it was not possible to establish elements of an exchange of information procedure on request that were in the Commission's view sufficiently clear to allow the Council to establish if they could be considered as equivalent.

19. Based on these discussions the Swiss final position, as confirmed at the last political meeting on 21st November, can be summarised as follows:

(i) Switzerland is not prepared to engage in automatic exchange of information on savings interest paid by Swiss paying agents to residents of Member States, neither from 1st January 2004 nor from the end of the transitional period. Based on their interpretation of the Feira European Council conclusions, the Swiss are prepared to take measures "to preserve the competitiveness of European financial markets". They do not however accept the stated purpose of the Directive that they should assist in enabling EC residents to be taxed in their Member State of residence.

(ii) Switzerland is prepared to introduce a "retention tax" according to the paying agent principle on interest paid by Swiss paying agents to individuals resident in Member States. This retention tax would however only apply to income which is not already taxed under the existing Swiss withholding tax provisions.

(iii) Switzerland is generally prepared to be flexible on the terms of the retention. It is prepared to close the gap of the so-called "affidavit funds" which are currently exempt from Swiss domestic withholding tax and has stated its willingness to apply the retention tax. Switzerland is also prepared to clarify that so-called "fiduciary accounts/deposits" would be included in the scope of the retention tax. Any withholding taxes levied previously on the same interest payments would be deducted from the retention.

(iv) Switzerland is prepared to apply the same rates of retention as Belgium, Luxembourg and Austria (15% during the first 3 years of the transitional period and 20% thereafter) and would even be willing to increase this rate up to its domestic withholding tax rate of 35% provided these three Member States are prepared to do the same.

(v) Switzerland is prepared to share the revenue of the retention tax and can accept the 75/25 division applied within the Community and may even be prepared to reduce the percentage of 25 depending on the "overall balance of the agreement". However the revenue sharing provisions will only apply to the new retention tax and not the existing withholding tax.

(vi) Switzerland is not prepared to commit itself to improved information exchange on request in the context of an agreement on savings taxation. It is however prepared to enter into separate bilateral negotiations with Member States with a view to providing administrative assistance on demand in cases of "tax fraud and the like" in line with its interpretation of the 2000 OECD Report on improving access to bank information for tax purposes and its specific arrangements with the U.S. which are not yet fully implemented in practice.

(vii) Such assistance would essentially focus on cases of tax fraud as defined by Swiss law but could extend to types of criminal activity which do not constitute tax fraud under Swiss law but which represent a "similar level of misbehaviour" in the requesting state. It would not be limited to the scope of the Savings Directive and could be introduced at the beginning of the transitional period. This would be based on a flexible interpretation of the double incrimination requirement and not on automatic recognition of the definitions of tax fraud and/or evasion applied by Member States. A false tax declaration signed by the taxpayer would for example not suffice.

(viii) The Swiss are prepared to agree to voluntary disclosure provisions and to integrate this commitment into an agreement with the Community.

(ix) They are also prepared to accept a review clause to the agreement which provides for a periodic review at least every three years and in any event two years before the end of the transitional period.

(x) In exchange for its co-operation on savings taxation, Switzerland wishes to obtain the benefits of the parent-subsidiary directive and the proposed directive on interest and royalty payments.

(xi) Switzerland's offer for a draft Agreement is also based on the understanding that the EU shall formally commit itself to entering into negotiations during the transitional period with Hong Kong, Singapore, Canada and Japan with a view to promoting the adoption by those jurisdictions of measures equivalent to those to be applied within the Community.

(xii) Switzerland also insists that an agreement on savings taxation should be part of a balanced agreement on the other aspects of the bilateral II-negotiations. It should be noted that in this context Switzerland refuses any "acquis" which could have an impact on Swiss bank secrecy, in particular as concerns judicial cooperation under Art. 51 SIC. It is not clear, how an agreement on Schengen, cooperation against fraud or services can be reached under these conditions. The negotiating directives issued by the Council on 17 June leave no margin of flexibility in this regard.

United States of America

Development of negotiations

20. From the beginning of this year there have been talks between the Commission, together with representatives of the Presidency, and U.S. Treasury officials. On 28th May 2002 Mr. Bolkestein met with Deputy Treasury Secretary Kenneth W. Dam in Washington to discuss this issue. At this meeting both sides reiterated the importance of the fight against tax evasion. In this respect the role of an appropriate and efficient exchange of information on cross-border income from savings was underlined. Both sides agreed to accelerate technical discussions to facilitate the EU meeting its deadline by the end of this year.

21. Several rounds of detailed technical discussions were held before and after this meeting (30 January 2002, 15 May 2002, 17 July 2002, 2 October 2002, 13 November 2002). These discussions served to obtain a better understanding of each other's positions. Based on these discussions, the U.S. position can be summarised as follows:

22. The U.S. is a strong supporter of effective exchange of tax information as a means of combating tax fraud and evasion. The U.S. believes that appropriately tailored information exchange relationships can be a valuable tool in ensuring full and fair enforcement of its tax laws. It has an extensive network of bilateral tax treaties and an expanding network of specific tax information exchange relationships with jurisdictions such as the Cayman Islands, Antigua and Barbuda, The Bahamas, the British Virgin Islands, the Netherlands Antilles, Guernsey, Jersey and the Isle of Man.

Results

23. Under its bilateral tax treaties the U.S. already exchanges information on a broad range of income including savings interest with those treaty partners that are able to reciprocate, which includes most Member States. Such exchanges include voluntary automatic exchanges of information on amounts of U.S. source income paid to residents of Member States that are reported to the Internal Revenue Service (IRS) under U.S. domestic reporting regulations which form the basis for this voluntary automatic exchange.

24. The coverage of U.S. domestic reporting regulations is largely consistent with the scope of the savings directive and is wider in the sense that these regulations also cover other types of income, e.g. dividends, capital gains, etc. There are however two important exceptions:

(i) Bank deposit interest: U.S. withholding agents currently only report bank deposit interest paid to U.S. citizens and residents of Canada. On 30th July 2002 the U.S. Treasury Department withdrew January 2001 proposed regulations and issued new proposed regulations. Under the new proposed regulations, interest on bank deposits would be reported to the IRS for nonresident alien individuals who are residents of certain specified countries. The specified countries are Australia, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden and the United Kingdom. The public hearing on the proposed regulations is scheduled for 5th December and the regulations are due to become effective from 31st December. The purpose of the proposed regulations is to facilitate appropriate bilateral information exchange with particular tax treaty partners of the U.S. If they are adopted they will provide a basis for improved voluntary automatic exchanges of information.

(ii) Non-U.S. source income: U.S. domestic reporting requirements only cover U.S. source income. Non-U.S. source income paid to non-U.S.-residents is not taxable in the U.S. and therefore considered not relevant for U.S. tax purposes. The Savings Directive is wider in scope as it covers all interest payments irrespective of the origin of the debt-claim producing the interest. It may be noted that most of the information exchange provisions in tax treaties between the U.S. and Member States follow Article 26 of the OECD Model Tax Convention, and therefore in principle offer scope for automatic exchange of information subject to specific bilateral arrangements between the Contracting States concerned. It may also be noted that the U.S. can provide information on non-U.S. source interest payments to its tax treaty partners on request. There are no specific restrictions on this relating to fraud or double incrimination.

25. The U.S. would be interested in improving its information exchange relationships with Member States' dependent and associated territories, particularly those in the Caribbean. The U.S. would also like to improve its information exchange relationship with those Member States (Belgium, Luxembourg and Austria) that are currently unable to provide bank information other than in cases of tax fraud.

26. The U.S. is not prepared at this stage to give a formal statement in relation to the savings directive. However its policy as described to the Commission in the bilateral discussions with the U.S. Treasury remains clearly focussed on a full and effective administration of taxes based on information exchange on a bilateral basis.

Andorra

Development of negotiations

27. In recent years Andorra has demonstrated a strong willingness to forge closer co-operation links with the EU. Most recently, earlier this year, Andorra requested the right to officially adopt the Euro as its national currency and to mint Euro coins. This may be a factor in Andorrra's appreciation of the savings tax issue. A decision on whether to commence negotiations with Andorra for such a Monetary Agreement is expected to be taken soon.

28. On 19th February 2002, following the Council's adoption on 13th December 2001 of the draft text of the Directive upon which negotiations are to be carried out, the Commission held the first meeting with the Andorra authorities. The Commission presented the background to the negotiations and referred to the growing international trend towards greater transparency in fiscal matters. As regards the objective of these particular negotiations, the Commission stressed that this was the automatic exchange of information and proposals for equivalent measures would always have to be viewed with this objective in mind.

29. The Andorra representatives explained that the introduction of a withholding tax during the transitional period of the Directive would be acceptable. However they considered it premature, at this stage, to look beyond the transitional period and the possibility of moving towards information exchange at that moment. They agreed to examine the possibility of the taxpayer to opt for voluntary disclosure in lieu of the withholding tax.

30. In April Andorra was placed on the OECD list of unco-operative tax havens.

31. A technical meeting took place on 22nd April during which the Andorra delegation said it would endeavour to present a proposal within one month.

32. The Commission received the Andorra proposal dated 30th May putting forward a withholding tax provided the other five states also adopt the same type of measures. There was no reference to information exchange.

33. On 6th August the Commission wrote to the Andorra authorities repeating the objective of the negotiations and referred to both the conclusions of the ECOFIN of 4th June and those of the Seville European Council of 21st and 22nd June. In addition the Commission enquired what action Andorra envisaged taking after the end of the transitional period in 2011.

34. On 4th October the Ambassador replied and expanded on the nature of the withholding tax as set out in the proposal dated 30th May. The rate of withholding tax was not specified.

The 4-point plan

35. On 18th October the Commission wrote advising the Andorra Ambassador that at the 8th October ECOFIN Ministers had reiterated that a withholding tax such as the one being proposed would not constitute an equivalent measure. Accordingly the Commission put forward a proposal of complementing the withholding tax with three other elements: voluntary disclosure; a review clause and a genuine information exchange on request. The Commission then arranged a meeting for these points to be discussed in more depth.

36. On 29th October the Commission met with the Ambassador of Andorra. The Ambassador confirmed that Andorra was unable to accept the automatic exchange of information as a basis for an agreement. It was agreed that the Commission should transmit a detailed questionnaire which would clarify the aspects of the withholding tax and to establish Andorra Government's position on the other elements of the 4-point package.

37. The Commission then wrote to the Andorra Ambassador on 8th November enclosing the aforementioned questionnaire.

Results

38. By letter dated 22 November 2002, the Andorra government expanded on its proposal for "equivalent measures", including the feasibility for introducing the other elements of the 4-point package.

(i) On the withholding tax itself, Andorra would be prepared to apply it on the paying agent principle. The initial rate would be lower than that of the Directive but it would increase and in due course match the rate set in the Directive. Andorra expects to negotiate the revenue sharing provisions.

(ii) The feasibility, from a juridical standpoint, for allowing the taxpayer to opt for voluntary disclosure (in lieu of the withholding tax) was currently being examined. Subject to a positive conclusion of this assessment such a provision would appear to be acceptable.

(iii) Andorra is not amenable to providing any information exchange on request explaining that, in its view, an arrangement for "equivalent measures" does not necessarily need to include such a provision.

(iv) As regards a review clause, Andorra indicated that the introduction of such a clause would be acceptable but only if it related to changing the rate of tax. At the same time, Andorra seeks a termination clause which it considers to be usual in most conventions.

Liechtenstein

Development of negotiations

39. On 13th March 2002, following the Council's adoption on 13th December 2001 of the draft text of the Directive upon which negotiations are to be carried out, Commission held the first meeting with the Liechtenstein authorities. The Commission presented the background to the negotiations and referred to the growing international trend towards greater transparency in fiscal matters. As regards the objective of these particular negotiations, the Commission stressed that this was the automatic exchange of information and proposals for equivalent measures would always have to be viewed with this objective in mind. Although at this time the mandate for negotiations had not yet been adopted, the Liechtenstein delegation indicated that while a withholding tax could be envisaged, any moves towards weakening Liechtenstein's existing provisions on banking secrecy were inconceivable.

40. The following month, Liechtenstein was placed on the OECD list of unco-operative tax havens.

41. On 27th May, following the adoption of the negotiating mandate in April, the Commission met again with Liechtenstein delegates. There it was confirmed that the introduction of a withholding tax under the paying agent principle could be acceptable but this would all depend on the evolution of the negotiations with other countries and most particularly with Switzerland. However, Liechtenstein's banking secrecy provisions were non-negotiable.

42. In the absence of any formal proposal having been received, the Commission wrote to the Liechtenstein Ambassador on 12th August repeating the objective of the negotiations and referred to both the conclusions of the ECOFIN of 4th June and those of the Seville European Council of 21st and 22nd June.

43. On 6th September the Liechtenstein Ambassador wrote formally confirming the proposal for a withholding tax. The tax rate was not specified. The same proposal envisages a review clause to allow modifications to take account of the evolution of the international competitive situation. The paper suggests one function of the review clause could be to alter the tax rate.

The 4-point plan

44. On 18th October the Commission wrote advising the Liechtenstein Ambassador that at the 8th October ECOFIN Ministers had reiterated that a withholding tax such as the one being proposed would not constitute an equivalent measure. Accordingly the Commission put forward a proposal of complementing the withholding tax with three other elements: voluntary disclosure; a review clause and a genuine information exchange on request. The Commission then arranged a meeting for these points to be discussed in more depth.

45. On 30th October the Commission met with the Ambassador of Liechtenstein and it was agreed that the Commission should transmit a detailed questionnaire which would clarify the aspects of the withholding tax and to establish the Liechtenstein Government's position on the other elements of the 4-point package.

46. The Commission then wrote to the Liechtenstein Ambassador on 8th November enclosing the aforementioned questionnaire.

Results

47. By letter dated 22 November 2002, the Liechtenstein government expanded on its proposal for "equivalent measures", including the feasibility for introducing the other elements of the 4-point package.

(i) On the withholding tax itself, Liechtenstein would in principle be prepared to accept the definitions of paying agent and interest payments, but has indicated possible difficulties in determining the exact scope of these terms. Liechtenstein can in principle also accept the rates of 15/20% mentioned in the draft Directive. Furthermore Liechtenstein could also envisage revenue sharing on similar lines to those set out in the draft Directive.

(ii) Liechtenstein advised that its law does not prevent voluntary disclosure as demonstrated by the U.S. qualified intermediary arrangements.

(iii) On information exchange on request, Liechtenstein was not open to developping co-operation and referred to its national legislation which does not offer any legal assistance in tax matters. However, reference was also made to international agreements where judicial assistance was already being provided in criminal matters.

(iv) Liechtenstein could envisage a review clause to take account of the functioning of the agreed solution in the light of its objectives. If necessary, the agreement could be modified, particularly with regard to the rate of withholding tax.

Monaco

Development of negotiations

48. On 1st March 2002, following the Council's adoption on 13th December 2001 of the draft text of the Directive upon which negotiations are to be carried out, the Commission held the first meeting with the Monaco authorities. The Commission presented the background to the negotiations and referred to the growing international trend towards greater transparency in fiscal matters. As regards the objective of these particular negotiations, the Commission stressed that this was the automatic exchange of information and proposals for equivalent measures would always have to be viewed with this objective in mind.

49. The Monaco delegation explained that while, in principle, a withholding tax could be possible, everything depended primarily on the Swiss position. Any moves towards information exchange would only ever be possible if all other countries did likewise.

50. The following month, Monaco was placed on the OECD list of unco-operative tax havens.

51. In the absence of any formal proposal having been received, the Commission wrote to the Monaco Ambassador on 12th August repeating the objective of the negotiations and referred to both the conclusions of the ECOFIN of 4th June and those of the Seville European Council of 21st and 22nd June.

52. On 13th September the Monaco authorities replied confirming the position expressed at the meeting in March. In the same letter the authorities asked whether the withholding tax at the rates of 15%/20% would constitute equivalent measures.

The 4-point plan

53. On 18th October the Commission wrote advising the Monaco authorities that at the 8th October ECOFIN Ministers had reiterated that a withholding tax such as the one being proposed would not constitute an equivalent measure. Accordingly the Commission put forward a proposal of complementing the withholding tax with three other elements: voluntary disclosure; a review clause and a genuine information exchange on request. The Commission then arranged a meeting for these points to be discussed in more depth.

54. On 28th October the Commission met with the Ambassador of Monaco and it was agreed that the Commission should transmit a detailed questionnaire which would clarify the aspects of the withholding tax and to establish the Monaco Government's position on the other elements of the 4-point package. The Monaco Ambassador indicated that the France-Monaco tax agreement could not serve as a basis for a Community agreement.

55. The Commission then wrote to the Monaco Ambassador on 6th November enclosing the aforementioned questionnaire.

Results

56. By letter dated 20 November 2002, the Monaco government expanded on its proposal for "equivalent measures", including the feasibility for introducing the other elements of the 4-point package.

(i) On the withholding tax itself, Monaco would be prepared to apply it on the paying agent principle and at the rate of 15%. Furthermore Monaco could also envisage revenue sharing on similar lines to those set out in the draft Directive.

(ii) A clause for the taxpayer to opt for voluntary disclosure (in lieu of the withholding tax) would be acceptable. Currently Monaco does not have the legal concept of bank secrecy.

(iii) Monaco is not amenable to providing any information exchange on request with the EU explaining that, in the absence of any income tax in the Principality, the concept of income tax fraud does not exist. However even if it were to be introduced at some future date, the principle of double incrimination would be strictly applied.

(iv) As regards a review clause, the statement indicated that the introduction of such a clause would be premature. However even if it were to be accepted, strict conditions would apply including the limiting of any such review to the current withholding tax mechanism.

(v) It was reiterated that Monaco's proposals were being made on clearly understood conditions, including the principle that Monaco should not be placed in a discriminatory and/or disadvantageous situation when contrasted to measures being adopted by other third countries or even certain EU Member States. In return for its co-operation, the Principality would require the same rights in the Community financial services market as Member States, in particular as regards insurance companies, insurance linked products and UCITS.

San Marino

Development of negotiations

57. On 14th January 2002, following the Council's adoption on 13th December 2001 of the draft text of the Directive upon which negotiations are to be carried out, the Commission held the first meeting with the San Marino authorities. The Commission presented the background to the negotiations and referred to the growing international trend towards greater transparency in fiscal matters. As regards the objective of these particular negotiations, the Commission stressed that this was the automatic exchange of information and proposals for equivalent measures would always have to be viewed with this objective in mind.

58. The San Marino delegation referred to important steps taken towards combating harmful tax practices and its committment to the OECD's project as well as a new agreement with Italy (concluded in March 2002) which enhances existing arrangements for providing information exchange on request. The San Marino delegation also stressed that as regards any further development on information exchange it was necessary to assess, beforehand, the economic impact of any such move. San Marino also expressed the need for a transitional period. The Commission offered assistance in this regard.

59. Accordingly a technical meeting focusing on those economic aspects took place on 7th May. At this meeting the San Marino delegation presented statistics of the role of the banking sector for their economy. The Commission enquired when a proposal from San Marino of acceptable "equivalent measures " might be forthcoming. The San Marino delegation explained that owing to current domestic political issues, totally unconnected to these negotiations, any such proposal would still take some time.

60. In the absence of any proposal having been received, the Commission wrote to the San Marino Ambassador on 12th August repeating the objective of the negotiations and referred to both the conclusions of the ECOFIN of 4th June and those of the Seville European Council of 21st and 22nd June.

61. By letter dated 3rd October the San Marino Ambassador advised the intention of the Government of keeping the existing withholding tax at least until 2010, duly adapted with the mechanisms which could be established taking account of the future Directive. In addition the San Marino authorities are committed to conclude double tax agreements which would include information exchange with EU Member States. Based on their commitment to the OECD, it would seem that San Marino is prepared to engage in a meaningful information exchange on request.

The 4-point plan

62. On 18th October the Commission wrote advising the San Marino authorities that at the 8th October ECOFIN Ministers had reiterated that a withholding tax such as the one being proposed would not constitute an equivalent measure. Accordingly the Commission put forward a proposal of complementing the withholding tax with three other elements: voluntary disclosure; review clause and a genuine information exchange on request. The Commission then arranged a meeting for these points to be discussed in more depth.

63. On 6th November the Commission met with the Ambassador of San Marino and it was agreed that the Commission should transmit a detailed questionnaire which would clarify the aspects of the withholding tax and to establish the San Marino Government's position on the other elements of the 4-point package.

64. The Commission then wrote to the San Marino Ambassador on 8th November enclosing the aforementioned questionnaire.

Results

65. In a statement dated 18 November 2002, the San Marino government expanded on its proposal for "equivalent measures", including the feasibility for introducing the other elements of the 4-point package.

(i) On the withholding tax itself, San Marino would be prepared to apply it on the paying agent principle and to revise the current rate of 13%. The Republic could also envisage revenue sharing on similar lines to those set out in the draft directive.

(ii) A clause for the taxpayer to opt for voluntary disclosure (in lieu of the withholding tax) would be acceptable.

(iii) San Marino is amenable to providing information exchange on request, through bi-lateral tax treaties, whilst always respecting the principle of double incrimination. This could apply even during the transitional period of the draft Directive. San Marino referred to the OECD initiatives and the commitments it had given in this regard.

(iv) However, as regards a review clause, the statement indicated that this did not seem necessary as it is always possible to review an international agreement in view of international developments.

66. In a covering note the Ambassador reiterated that San Marino's proposals were being made on the clearly understood premise of the "necessity of safeguarding the Republic's economic and financial system and to guarantee its international development and particularly as regards the EU ambit."

Conclusions

67. The Commission focussed, in the negotiations, on obtaining assurances in relation to measures that could be considered equivalent to those provided for in the draft Directive on the Taxation of Savings Income.

68. The six countries with which the Commission was mandated to negotiate can be divided into two groups. The first consists of the United States of America which is an active proponent of information exchange and which already exchanges information on a bilateral basis with many countries. The second group consists of those countries that consider the protection of bank secrecy to be important and who are in principle not in favour of highly developed exchanges of information. This includes the five other countries that the Commission has been negotiating with. Within this second block it is the Swiss position that is the most significant given that the other countries look to Switzerland for its lead in this matter.

69. In relation to the U.S. the analysis of the current information exchange possibilities between the Member States and the U.S. shows that current tax treaty provisions provide a solid basis for the development of the existing wide ranging information exchanges. The U.S. is in the process of extending the coverage of its domestic reporting requirements to provide a more complete basis for information exchange with those of its tax treaty partners that are prepared to reciprocate.

70. The other third countries that is Switzerland, Liechtenstein, Monaco, Andorra and San Marino have all proposed to apply withholding taxes as "equivalent measures".The Commission has tried to obtain commitments from these countries to a four-point plan which takes into account their firm opposition to automatic information exchange but which would allow agreement on genuine "equivalent measures". This consists of a withholding tax, measures to encourage voluntary compliance, genuine information exchange on request and a review clause. The crucial player in this second group is Switzerland. At this stage the Commission considers that there is a basis for agreement on three of the four elements. The sticking point remains the appreciation of the Swiss offer on the exchange of information on request. The other countries have not at this stage committed themselves to a substantial level of detail however it could be reasonably expected that they would do so if an agreement was reached with Switzerland.