EU savings taxation rules and savings agreements with third countries: frequently asked questions
Why is an EU approach to tackling evasion in the area of savings taxation important?
A strong unified stance in tackling tax evasion is essential when part of a Single Market. It:
- Ensures clear consensus within the EU on the approach to be taken in ensuring Member States can collect the revenues they are due, prevents market distortions, and guarantees good cooperation between national authorities
- Gives "strength in numbers" when dealing with non-EU countries, to the benefit of all Member States
- Helps to avoid a patchwork of national approaches which can leave large areas uncovered, thus opening the way for tax planning schemes.
Given the importance of Member States being able to collect all the taxes they are due, particularly in these difficult times, the Commission believes that a coordinated approach to tax evasion is the most effective way forward, and must remain a political priority.
Reinforcement of the Directive on taxation of savings income is one of the key actions of the Commission's action plan to fight tax fraud and evasion (IP/12/1325 and MEMO/13/1096).
What EU provisions are currently in place for savings taxation?
EU Savings Directive
At EU level, the Savings Taxation Directive applies to all Member States. The aim of this Directive is to tackle cross-border tax evasion by creating an information exchange system for tax authorities to help identify individuals that receive savings income in a Member State other than their own. The core of the Savings Directive is the principle of automatic exchange of information. This means that Member States collect data on the income from savings of non-resident individuals, and automatically provide this data to the authorities where the individual resides.
Currently, 26 Member States apply the automatic exchange of information. Two Member States – Austria and Luxembourg – are allowed, for a transitional period, to apply a withholding tax instead of engaging in the automatic exchange of information. Currently, the rate of this withholding tax is 35%. Luxembourg has announced that from 2015 it will participate in the automatic exchange of information.
Savings Taxation Agreements with Third Countries
In parallel to the Savings Directive which applies within the EU, the EU has savings taxation agreements with 5 neighbouring third countries: Switzerland, Andorra, Monaco, Lichtenstein and San Marino. The aim of these agreements is to assist Member States in recovering tax revenue they may be due from citizens who have savings accounts in these countries. The agreements also seeks to create a more level playing-field between Member States and their non-EU neighbours, by getting these countries to apply measures which are equivalent to those laid down in the EU Savings Directive.
Under the current EU-Swiss Agreement, Switzerland applies a 35% withholding tax when payments are made to EU citizens' earning interest on savings there. From an EU point-of-view, the purpose of this withholding tax is to deter tax evasion and encourage account-holders to voluntarily disclose the savings that they have in Switzerland. If EU residents authorize their Swiss financial intermediary to disclose the information on income from these savings to the Swiss tax authorities for the purpose of automatic exchange of information with the tax authorities of their Member State of residence, these tax payers avoid the withholding tax. If taxpayers are subjected to the withholding tax but nevertheless declare the income to their tax authorities, they can be refunded the difference between this high level of withholding tax and the (usually lower) national tax rate. The high level of withholding tax therefore acts as an incentive to be tax compliant. This is a punitive tax for evaders, while the refund system rewards those who honestly disclose their income.
The current EU-Swiss Savings agreement also provides for information exchange on request, within a limited scope (e.g. in cases of fraud). When an EU Member State suspects that one of its citizens is using a Swiss bank account for fraud or money-laundering purposes, it can ask the Swiss authorities to provide information on a specific account.
In May 2013 the Commission was given a mandate to negotiate stronger tax agreements between the EU and Switzerland, Andorra, Monaco, San Marino and Liechtenstein, respectively, in line with developments at EU and international level.
These negotiations are progressing well. Two rounds of formal negotiations have been concluded with all 5 countries, complemented with more technical meetings where necessary. The Commission sent a report on the progress in these negotiations to the Presidency and Member States, which Commissioner Šemeta will present to the ECOFIN Council on 11 March. He will detail how all five third countries appreciate the benefit of working towards alignment with the EU, based on the widest automatic exchange of information, and in line with the Global Standard.
What has the Commission proposed to change?
In 2008, the Commission proposed a revision of the EU Savings Directive, in order to close loopholes in the legislation that were being exploited by tax evaders (see IP/08/1697, see MEMO/08/407). For example, the proposal foresees extending the scope of the Directive to cover investment funds, pensions and innovative financial instruments. It will also capture payments made through structures such as trusts and foundations. This will help prevent tax evaders from escaping the provisions of the Savings Directive by channelling their money through structures outside its current scope.
The EU agreements with Switzerland and the other 4 countries are meant to largely reflect the measures applied internally within the EU. Therefore, any change to the EU Savings Directive should also be accompanied by an adjustment of the savings agreements with these countries.
What else is the Commission doing to extend automatic exchange of information in the EU?
In June 2013, the Commission proposed extending the automatic exchange of information between EU tax administrations, to cover all forms of financial income and account balances (IP/13/530). Combined with the new Savings Tax Directive, this proposal paves the way for the EU to have the most comprehensive system of automatic information exchange in the world. It will also ensure that the EU will be well-placed to implement the new global standard (see below) quickly and with minimum disruption to businesses. The proposal should be adopted by Member States by the summer, in accordance with the call made by the European Council in its conclusions of 20 December.
What has been achieved at international level for more tax transparency, and what has been the EU's contribution to this?
In February 2014, G20 Ministers of finance endorsed the essential elements of a new global standard for automatic exchange of information between tax administrations (see STATEMENT/14/16). The EU has drawn on its own experience and expertise in this area to actively contribute, through the OECD, to the development of the new global standard. In particular, the Commission has tried to ensure that the global standard takes into account the existing EU automatic information exchange arrangements and is compatible with EU law (e.g. data protection), so as to avoid any unnecessary difficulties for businesses. To minimise the compliance costs for users and effected persons, the EU will align both the Savings Directive & the Directive on Administrative Cooperation with the Global Standard, well in advance of implementation.
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