Cicero Policy Briefer

Issue 27, August 2008

What’s on the horizon for European tax havens?

By Edmund Lakin

The more shadowy aspects of offshore banking have traditionally centred on places such as Bermuda, the Channel Islands and Panama—but European tax havens are increasingly coming under the scrutiny of EU policy makers. Over the course of 2008, attention has been refocused on possible tax scandals emanating from the small principality of Liechtenstein. This has led to increased calls within the EU for a clampdown on tax havens.

The Liechtenstein affair involved the German Government, an alleged conspiracy and payments for allegedly stolen information; it has triggered a series of tax investigations in various countries whose governments suspect that some of their citizens have evaded their tax obligations by using banks and trusts based in Liechtenstein. It is no secret that EU member states have not been happy with smaller countries providing favourable tax structures to those wishing to escape ‘punitive’ tax: Gordon Brown has led various campaigns against tax havens, and at one point the French government called for an outright boycott, arguing that EU banks should refuse to deal with them. The Liechtenstein affair is seen as an opportunity to put pressure on the principality, which is one of the remaining uncooperative tax havens as identified by the OECD back in 2007 (the others being Andorra and Monaco).

In their present form, tax havens are covered by the EU Savings Tax Directive, which requires EU members to share information with each other on interest income paid to account holders from other EU countries. This was agreed after special arrangements were made for Austria, Belgium and Luxembourg, who were keen to protect their banking secrecy: these three countries do not have to exchange tax information, but instead charge foreign account holders a ‘withholding tax’ on interest income. The EU has similar bilateral arrangements requiring a withholding tax with countries known for their banking secrecy, such as Switzerland and Liechtenstein. Now, though, these rules are likely to change.

At the March meeting of the Economic and Financial Affairs Council (Ecofin), which followed the Liechtenstein furore, Germany won the support of the majority of countries to call for the European Commission to bring forward a review of the Savings Tax Directive. The European Commission deadline is 30 September; the Commissioner for Taxation and Customs Union, László Kovács, has stated that he intends to present “concrete amendments” in the review. Kovács has already dropped several hints as to some of these amendments: he has said that he will propose to extend the scope of the Directive, which currently applies only to bank accounts, to possibly foundations or trusts, and to make the law applicable to legal entities rather than just individuals. He has also been quoted as saying that any reform of the Directive should include a plan to phase out the withholding tax in favour of an exchange of tax information—a measure which could be a critical blow for those that cherish their banking secrecy.

The defenders of banking secrecy are nonetheless adamant in their line that the scope of the Directive is non-negotiable. However, they are likely to come under increasing pressure to make concessions. In the past month alone two new inquiries have been instigated, the first in the UK and the second in the US: the Treasury Select Committee has begun an inquiry into the role played by tax havens in financial stability, while the Senate Investigation Committee has published a report on how UBS, a Liechtenstein bank and various wealthy individuals allegedly hid billions of dollars from tax authorities. Legislative change on EU tax issues requires a unanimous vote of Member States. However, with claims of billions of euros in lost revenue through tax evasion from various European countries coupled with a fiscal situation requiring all the extra revenue they can get, it could prove difficult for Austria, Liechtenstein, Monaco, et al to continue to hold their line.

Edmund Lakin can be contacted on +44 (0)20 7665 9535 or click here to email.