Proposals from Brussels to upgrade the EU's Savings Tax Directive (STD) would extend it to cover to all investment funds or schemes, wherever located. The rules would apply whatever the legal form and regulatory regime of the funds. Investments in debt claims or other equivalent securities would be covered. New rules would tackle tax dues that may at present be avoided using intermediate tax-exempt structures.
The European Commission states that all the current references to the UCITS Directive for investment funds established in the EU will be replaced by a reference to the registration of the fund in accordance with the domestic rules of any of the member states. It continues that for investment funds established outside the EU, "a broad definition" of investment funds or schemes will be used.
The Commission describes the present version of the STD, which came into effect in mid-2005, as being "easy to circumvent". The directive provides for an exchange of tax information rules in order to crack down on tax evasion by wealthy private individuals. There is an alternative option to apply a withholding tax.
Taxation Commissioner László Kovács says: "The current scope of the directive needs to be extended in order to meet our goal of stamping out tax evasion, which affects national budgets and creates disadvantages for the honest citizens."
He says that the Commission would like to enlarge the scope of the Directive to income from: securities which are equivalent to debt claims (of which the capital is protected and the return on investment is pre-defined); and to life insurance contracts whose performance is strictly linked to income from debt claims or equivalent income and have less than 5% risk coverage.
The proposals also cover trusts or foundations outside the EU. Paying agents in the EU would be required to use the information available to them. As for trusts and foundations within the EU, but not taxed, the bank or financial institutions would be obliged to apply the Directive upon receipt of payment, regardless of whether it was passed on to the owner.
This particular noose-tightening exercise, which no doubt has off-shore tax havens much in mind, should be seen in parallel with various other ‘clean up' recipes under discussion in Brussels.
International tax lawyer Richard Hay notes that mutual funds and investment funds are well within the concerns addressed by the STD. Defending the position of international financial centres (IFCs), he said that investors in mutual funds, international pension plans, insurance and reinsurance use IFCs for reasons of tax neutrality, not secrecy.
Subsequently, Jersey Finance complained that the STD had already "driven a significant amount of grey money to jurisdictions to beyond the reach of the relevant taxing authorities". It advocates "robust anti-money laundering regulations …for tackling tax avoidance in the EU". Jersey's net asset value of investments approaches £500bn.
A "cautious" reaction to the STD revisions comes from the European Funds & Asset Managers Association (EFAMA), the Brussels-based institution whose members' assets held in Ucits funds exceed €7trn. Peter De Proft, director general, tells IPE that the revisions after only three years are "early". A formal statement from EFAMA points to "newly imposed administrative cost burdens". But it welcomes the move towards "a level playing field among competing savings products".
Against possible pressures to dilute the Commission proposals, the finance ministers will have been aware of pressure from the EU Parliament. The rightist European Peoples' Party is "in favour of the general direction of the Commission's proposals". President of the socialists, Poul Nyrup Rasmussen is more strident. He would close "offshore tax loopholes".
Also under consideration by the finance ministers were the positions of the exchange-of-information-opt-out countries, Belgium, Luxembourg and Austria. They are required to levy withholding taxes on savings, currently set at 20% (35% from summer 2011).