After months of argument and compromise, the EU Savings Tax Directive looks set to be finally implemented. John Sheath, director and general manager, Bradford & Bingley, explains what this means to banks and their clients
The impending implementation of the EU Savings Tax Directive (EUSTD) may have a major impact upon the offshore finance industry. It looks increasingly certain that the implementation date will not be postponed further and that 1 July will see either the application of automatic disclosure about interest payments or retention/withholding tax at source for individuals resident in the EU member states.
As with all change, the degree of upheaval associated with the EUSTD is uncertain. One aspect of uncertainty is that it triggers a relative explosion of innovation, and the offshore deposit takers are unlikely to be an exception. Already there have been developments in product structures and this is likely to continue. The direction taken by the offshore jurisdictions such as Jersey, Guernsey and the Isle of Man has ensured that clients in these jurisdictions have a choice between a default position of retention tax or disclosure of information on interest payments, and this has helped fuel the number of options being developed for the market.
Open to interpretation
The latest version of the joint Isle of Man/Channel Islands Guidance Notes were issued in December 2004 by the tax authority in the Isle of Man. As with all Guidance Notes, they are not prescriptive and the coming months will see different interpretations being made by the financial institutions within the offshore jurisdictions.
The interpretation of these notes by an institution may well have the biggest impact for the existing offshore customer base. Examples of these will be in the areas of the apportionment of interest (whether for retention tax or disclosure purposes) on a joint account; or another example would be whether certain types of trust-held money will be subject to the directive or not.
Perhaps one of the biggest potential areas of difference between institutions will be the basis on which the paying agent decides whether they have sufficient information in order for them to know that no tax liability arises for the customer. This interpretation will be particularly pertinent for EU nationals who are resident outside of the EU member states, as the directive indicates that in the absence of proof to the contrary for new relationships entered into after 1 January 2004, the member state that issued the passport or other official identity document for the individual shall be considered to be the country of residence for tax purposes.
Proof of residence
In relation to what is proof of residence, the current guidance notes indicate that for some existing customers it may be appropriate to rely on self-certification by a customer or on customer due diligence information, where the paying agent does not have contrary evidence and the assertion is consistent with the paying agent's understanding of the customer's circumstances. In other cases, the customer may be able to supply documentation from a tax authority or other source, which would assist in confirming their tax status, for instance, a confirmation of that status by a professional third party such as a lawyer or accountant. As one might expect, the guidance notes are careful to re-confirm in this area that the ultimate responsibility for a decision in this area lies with the paying agent.
Clearly with such potential for divergence in approach, customers, advisers and paying agents are going to be busy communicating in 2005.
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