new EU DIRECTIVE will REQUIRE INCOME FUNds to impose a withholding tax
The UK has issued guidance to intermediaries on the EU"s savings tax directive, which requires income funds to impose a withholding tax or pass on information about their clients.
The Inland Revenue guidance note comes ahead of rule changes expected to be introduced in the UK Budget. The note requires UK investors using offshore funds with at least 15% of holdings providing interest to report a client"s share of the income to the Inland Revenue. But the directive, which was passed last June, requires all member states to impose a withholding tax or allow national tax departments to exchange information on who the clients are to help prevent tax evasion. The withholding tax, for example in Luxembourg, would start at 15% but over time increase to 35%. Other countries, such as Austria, are also likely to prefer a withholding tax rather than compromise investors" identity to the tax authorities.
The income covered is all interest-bearing revenue, from dividends or bonds and bank accounts. But Robert Priester, senior legal adviser at Fefsi, the European Federation of Investment Funds and Companies, says: "The rules are going to be a mess. The definition of 'interest-bearing" and deciding who the paying agent will be varies across countries."
The paying agent is to be the person responsible for reporting who the ultimate beneficiaries of the income is and reporting their name, address and tax identifier to the authorities. The agent could be the intermediary advising the client or the fund management group, which would then have to know each of their investors" personal details.
The UK"s funds trade body, the Investment Management Association (IMA), is trying to convince the Inland Revenue to allow the paying agent to be the adviser rather than the fund manager. Davood Eslami, tax adviser for the IMA, says because the UK fund management and administration structure can be so complex due to outsourcing, the Revenue should have a more flexible approach.
Although the rules are meant to be enforced from January 2005 there is a chance the directive could be scrapped in June this year. The member states, which from May will be expanded to 25 from 15, will have a chance to vote on whether non-EU countries with large offshore banks and fund managers are also meeting the rules. These third party countries, such as Switzerland, Liechtenstein, Monaco and the UK territories in the Channel Islands and Caribbean, but not others, such as Singapore, are required to put in place similar information exchange or withholding tax requirements. If they refuse, which is seen as highly possible, then any EU member state can veto the directive.
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