That the EU Savings Directive exists at all is a great success but its scope is too narrow and long-term it is likely to fail in its basic aim
"The ultimate aim of the Directive is to enable savings income in the form of interest payments made in one member state to beneficial owners who are individuals resident for tax purposes in another member state to be made subject to effective taxation in accordance with the laws of the latter member state."
These are the words of Article 1 of Council Directive 2003/48/EC, the EU Savings Directive ("the directive"), which make clear the objective behind what has been a slow and painful process.
This process arguably reached its conclusion on 1 July 2005 when the directive finally came into force. When a paying agent makes an interest payment to an EU-resident individual in another EU member state, full details will be reported to that individual's revenue authority or, in some cases, tax will be withheld from the payment. A few weeks in, it is now a good time to see how things have gone, and what might need to change if the objective underlying the directive is to be met, assuming, of course, it has not been already.
The first point on which the politicians are probably to be congratulated is that we have reached this stage at all. There have been numerous hiccups and diversions along the way, at least two delays in the intended implementation date, and many who thought, and, I suspect, in some cases hoped, that the day of implementation would never dawn.
It has also received very wide coverage. Set out in the table opposite is the full list of territories adopting the directive or equivalent proposals. In all, there are a total of 40 territories.
Not only have all "original" EU member states signed up but also all the accession states that joined part way through the process. It has also been extended to many non-EU territories, including Guernsey, therefore further enhancing, in theory at least, the effective taxation of savings income earned by individuals resident in EU member states.
So, the directive is in force, and Germans with funds in Luxembourg (apparently the original issue that led to this whole process in the first place) are now being effectively taxed in Germany and evasion is a thing of the past. Well, not quite.
To begin with, as in all best political compromises, the provisions have been watered down along the way. Three countries - Austria, Luxembourg and Belgium - were not happy about disclosing information and insisted on a withholding tax option, for a few years at least, which has been duly made available to them. A number of the third-party territories, including Jersey, Guernsey and the Isle of Man, and, perhaps unsurprisingly, Switzerland (for whom disclosure would be a cultural step change), followed the same path. While a large proportion of whatever tax these territories do withhold is to be paid over to the relevant member state, it is clearly not what was envisaged under Article 1.
Even without this derogation, the directive can hardly be considered all encompassing in its coverage. It is limited to payments to EU-resident individuals. Ignoring the flaws in the process for determining residence, which can end up with the individual's tax residence being a secondary consideration, the directive is relatively narrow in its application. It does not affect interest payments to companies, partnerships and most trusts. Most funds are also excluded from its application.
Closer to home, the authorities in the Channel Islands and Isle of Man have taken the pragmatic step where UK resident but non-domiciled individuals, a significant source of business, are concerned, and exempted them from the application of the directive, provided they can demonstrate the income is not remitted to the UK.
For the limited circumstances in which individuals are caught, it is also a big world out there. There is nothing to prevent an individual with funds located in a territory where the directive applies simply moving these to a location where it does not, or at least to a territory where the paying agent is not so affected. Places such as Singapore and Bermuda (the latter seemingly omitted from directive because of a lack of knowledge of geography on someone's part) cannot be accused of being backwards at coming forward in reminding investors of this.
All this was well known before 1 July. What has emerged since is that not everyone is quite as ready as they should be. At least one territory (where the weather is warmer than average) is believed to simply not be in a position to actually implement what it has signed up to. Time will tell how widespread this situation is.
At the last moment, a glitch emerged in the relationship between Gibraltar and the UK. Gibraltar is treated as part of the UK for the purposes of the directive, so no-one thought through this means there is no provision in place for reporting on payments between the two. This puts Gibraltar at an advantage compared to other low-tax jurisdictions, at least when it comes to the application of the directive on interest payments to the UK, which therefore fails the "level playing field" condition some territories have attached to taking part in this process.
The UK will be allowed some time to sort this out, but it seems likely there will be other issues emerging in the next few months, in which time the first reporting/ withholding will be taking place.
It is probably still the case that not everyone has been properly informed of the coming into force of the directive. As a Guernsey resident, I have an interest bearing account in the UK, but the bank concerned still has not informed me that it will be reporting information on my account to the Inland Revenue. The directive has been fairly well publicised, but this may become more of an issue as more people are affected by it in practice.
Success or failure
So a few weeks after its implementation, is the directive a success or failure? Realistically, it is too early to tell. Having got further than maybe most expected and many, including some revenue authorities burdened down with additional administration and potentially limited reward, hoped.
However, the implemented directive is limited in its application, so what would be generally accepted as the laudable objective of Article 1 is unlikely to be achieved. To this extent alone it is perhaps reasonable to brand it a failure.
It then remains to be seen whether the response to this will be to let it quietly continue on the same basis or to broaden the scope of its application when it comes up for review in three years time. However, even if the mesh on the net is tightened, its diameter cannot be.
EU savings directive came into force on 1 July, a big achievement involving 40 territories.
Overall impact undermined by the likes of Austria, Belgium, Jersey and Switzerland opting for with-holding tax option.
Singapore and Bermuda are indirect beneficiaries of the savings directive.
Directive comes up for review in three years.
More dates to be announced
Lowest level since 2016
Subset of fintech
Just one-fifth not in favour
Armed forces charity