It is a view that has littered the pages of International Investment liberally over the past year, b...
It is a view that has littered the pages of International Investment liberally over the past year, but it bears repeating once again - what a mess the EU Saving Tax Directive (STD) is in.
On 1 July 2005, every investor with an EU passport will have to go through all of their cross-border interest paying assets - especially bank accounts and bonds - and be prepared for not only a quizzing on their tax status but also for a decision: whether or not to exchange or withhold (see technical notebook on page 23 for details).
It should be reasonably straightforward. If you have an account in a jurisdiction which has not chosen automatic exchange of tax information - Luxembourg, Austria, Belgium, Switzerland, Jersey, Guernsey, the Isle of Man, the Caymans, the British Virgin Islands (not Bermuda of course, due astonishingly enough to a drafting error) - you can choose instead to pay a 15% withholding tax, which will be anonymously distributed between your home state and the domicile of the account.
However, there is another option - a third way, as it were: put the assets into one of the myriad investment structures that do not fall under the ambit of the directive, (see lead story on page 5 for problems in this regard). Surely the right thing for a financial adviser to do would be to advise their client to minimise their tax burden if possible? Yet to publicly state that the reason you are moving your client's assets out of an STD prone product and, say, into a company, a trust, a non-interest paying bank account, a fund, a structured product, and so on purely in order to avoid this tax is regarded as politically unacceptable and may even be punishable.
So, be prepared for a host of obscure alternatives to bank accounts to crop up, none with any apparent benefits over normal accounts but all with this mysterious tax planning allure. On a side note, it will be interesting to listen out for a number of offshore banks in whispered negotiation with their regulators on the subject of whether the returns from their structured product range qualifies as 'interest' or not.
And speaking of political acceptability, what of Europe's warmly welcomed newcomers? Will Hungary, Slovakia and Lithuania (to pick a few at random) be ready to implement this directive in time? Admittedly the 'information exchangers' have until the end of the tax year to prepare themselves but where is the guarantee that these notoriously shaky banking industries will all be upgraded with the new technology to cope? And if not, what of the famous 'level-playing field' that was promised?
It looks increasingly likely that despite the lack of fairness in the whole process, the mainstream offshore centres will implement the directive, against their will and against their interests.
All we can hope is that the amount collected in this new European tax is so pitifully low because of all the loopholes in the legislation that the European bureaucrats who thought it up, freshly stung from the French (and probably Dutch) 'no' votes on the EU constitution, will retreat to their kennels, allowing the respectable inhabitants of the offshore world to go about their respectable business in peace, at least for a while.
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