the euSTD will impact cash holdings as it comes into effect in 2005. john sheath examines the changes to be made to product structure and client relationships
Interest rates are still the major criteria when choosing where to place cash holdings. The general consensus is that sterling interest rates are likely to be held in 2005, with some economists indicating that there may possibly be one more rate rise this year before the peak in rates is reached in this current cycle.
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.
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.
The latest version of the joint Isle of Man/Channel Islands guidance notes were issued over the Christmas period 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 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.
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 which issued the passport or other official identity document for the individual shall be considered to be the country of residence for tax purposes.
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. The 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.
Has run Cautious Managed fund since 2011
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