EN
EUROPEAN COMMISSION
DIRECTORATE-GENERAL TAXATION AND CUSTOMS UNION ANALYSES AND TAX POLICIES
Direct tax legislation
Brussels, 27 March 2008
Taxud-E2 – GM_VH_DW_CL/gm GT4\080401\doc_2\EN\en-02-02
Orig. EN
W O R K I N G P A R T Y I V – D I R E C T T A X A T I O N
Questions arising from a first analysis of the comments
received on the Working Document prepared by the
Commission services on 14 March 2007 for the Expert
Group on Taxation of Savings
Meeting of 1 April 2008
Centre de Conférences Albert Borschette Rue Froissart 36 - 1040 Brussels
WORKING DOCUMENT
B-1049 Brussels / Belgium. Room: MO59 6/75.
Telephone: central (32-2) 299.11.11; direct line (32-2) 295.76.36. Fax: (32-2) 299.80.52. E-Mail: [email protected]
1. Introduction
In accordance with Article 18 of the Council Directive 2003/48/EC on taxation of savings income in the form of interest payments (Savings Directive hereinafter), “The Commission
shall report to the Council every three years on the operation of this Directive. On the basis of these reports the Commission shall, where appropriate, propose to the Council any amendments to the Directive that prove necessary in order to better ensure effective taxation of savings income and to remove undesirable distortions of competition”.
As the provisions of the Savings Directive came into effect on 1 July 2005, the Commission intends to present its first report in the second half of 2008.
The monitoring of the correct functioning of the Savings Directive concerning exchange of information and transfer of funds from withholding tax is carried out by representatives of your respective administrations and the Commission services in the Working Group on administrative cooperation in the field of Direct Taxation. In parallel, this Working Party IV on Direct Taxation has been examining, since November 2005, the legal aspects of the operation of the Savings Directive, in order to advise the Commission services on any significant element for the review of the Savings Directive which could be incorporated in the Commission report to be presented later this year.
In 2007 the Commission services extended the consultation to market operators represented in an Expert Group set up for this purpose. This consultation has been based on a Working Document issued by the Commission services on 14 March 2007 (ref. 000701\workingdoc\en-05-08). The Working Document was also discussed by Working Party IV on Direct Taxation at its meeting of 15 June 2007. The opinions expressed by you at the meeting and in 16 written contributions received from you in 2007 are summarized in a separate paper which is also presented to you today.
The outcome of the consultation of market operators held in 2007 in the Expert Group is now available. The written contributions received from the individual experts and from the Trade Associations are published in their full version on the following webpage: http://ec.europa.eu/taxation_customs/taxation/personal_tax/savings_tax/savings_directive_review/index_en.htm and a provisional Summary of these contributions has been submitted to you for today's meeting.
The present document, which follows the order of presentation of the issues in the Working Document of 14 March 2007 (the title of each subject refers to the relevant questions raised in that document), is aimed at drawing some initial conclusions, under the exclusive responsibilities of the Commission services, from the contributions received from the experts and Trade Associations and from the opinions expressed until now by you and your Administrations within the framework of this Working Party. It also contains a number of questions whose answers will provide the Commission services with a better understanding of the likelihood of support from Member States on specific elements of improvement of the Council Directive 2003/48/EC (and more generally of cooperation between Member States on the Taxation of Savings) which could be further explored in the Commission's first report on the Directive.
2. ARTICLE 2:BENEFICIAL OWNERSHIP
2.1. Beneficial ownership: Extending the scope to all interest payments made to entities and legal arrangements or possibly only to those payments made to entities and arrangements whose beneficial owner is an EU resident individual (“look-through” approach), according to the Anti-Money Laundering rules (Q1-Q2-Q3)
Although an extension of the provisions of the Savings Taxation measures to all interest payments made to all entities and legal arrangements would seem to provide an absolute guarantee that the provisions may no longer be circumvented, such a radical solution does not seem feasible as it would require agreement at a much wider geographical level than just the EU in order to be effective.
Limiting such an extension of the scope to the interest payments made to entities and legal arrangements only if established in other EU Member States would, on the other hand, not provide any guarantee of effectiveness and would probably encourage an outflow of capital outside the EU, whilst creating an overwhelming administrative burden on the whole chain of interest payments and requiring disproportionate resources at the level of the tax administrations in order to assess the data received and detect – between the signals received from the different layers of the chain of payments – what information is useful for taxation purposes.
For the above reasons, a more selective solution had been suggested by the Commission services in Questions 1 to 3 of the Working Document of 14 March 2007, where a
“look-through” approach would have had to be applied by the paying agent without substantially
changing the current scope of the Savings Directive insofar as it is limited to interest payments whose beneficial owner is an EU resident individual. Such an approach would have consisted in submitting to the Directive also those payments for which the Anti-Money Laundering rules provided ground for identifying an EU resident individual as the beneficial owner, through the screen of an entity or arrangement. Despite the support expressed by 4 Member States in this Working Party for this solution, a broad application of it does not seem advisable, according to the comments received from a number of other Member States and from a large majority of the Experts and Trade Associations participating in the Expert Group.
The responses indicate that requiring the paying agent to check beneficial ownership of the interest payments made to entities and legal arrangements established, within the EU, in other EU Member States would be significantly burdensome, and not necessarily effective.
Apart from the difficulties linked to the lack of experience in managing the data under the third Anti-Money Laundering Directive (AMLD), which could be of transitional nature, there is a more substantial objection to the application of a “look through approach” for payments to entities and legal arrangements established in the EU (and in the jurisdictions outside the EU applying equivalent savings taxation measures), which relates to the resulting uncertainty over identifying who is the paying agent under the Savings Directive. This uncertainty could lead to the duplication of reporting of, or withholding on, the same interest payment for the same beneficial owner or, conversely, to the non-reporting of the portion of interest payment received by other beneficial owners which are not known by the upstream economic operator making the payment. Market operators suggest that an effective and efficient solution should not be contradictory to the underlying principles of the Savings Taxation Directive inside the EU, according to which only a single layer in the chain of payments (at present, the ‘last link in the chain’) should have the task to report (or, transitionally, to levy a withholding tax) on
interest payments. Alternative ways to better ensure taxation of savings income channelled through entities and arrangements established within the EU are therefore explored in the following Chapter 4 of this document.
A more realistic and, in principle, more effective alternative solution for making use of the information available under the AMLD was suggested by one of the members of the Expert Group, with the support of the Trade Association he represents. He suggests limiting the look-through approach, similar to an anti-avoidance measure, to the interest payments made to entities and legal arrangements established outside the Member States of the EU and outside those countries of the EEA which are able to exchange information in tax matters with Member States. A paying agent established in an EU Member State, and already subject to the AMLD obligations, who pays interest to such an entity or legal arrangement and has identified that the beneficial owner of the payment, for AMLD purposes, is an individual resident in another EU Member State, would therefore apply the Savings Taxation Directive as if the interest was paid directly to that individual.
The Commission services consider that it would be worth reflecting further on this alternative solution. If a similar solution were to be applied by the other jurisdictions outside the EU which participate in the savings taxation measures, this would allow excluding from the “look-through” approach the interest payments made to legal entities and arrangements established in these other jurisdictions.
Further consideration should be given to the following issues:
• Experience on the application of the 3rd AMLD to transactions with legal entities and legal arrangements;
• Compatibility of the solution with the organisation and the hardware/software resources of the paying agents, in order to limit the additional burden on them;
• Possible ways to define “ex-ante” (thanks to a positive list?) those entities and arrangements for which (because of their geographical location and the certainty about their tax treatment) the paying agent would not be obliged to apply the “look-through” approach for savings taxation purposes;
• Ways to limit the exchange of information when the beneficial owner for AML purposes can provide proof that he does not “own”, but only has a control over the entity/arrangement; and mainly,
• Modalities for making this solution compatible with the legal requirements of the free movement of capital also in those Member States and non-EU countries and territories where the savings taxation measures are still applied by paying agents in the form of a withholding tax. It would be worth, for instance, considering an amendment of Article 13, in order to make compulsory, for Member States levying the withholding tax, the procedure of voluntary disclosure set by paragraph (1) (b) of this Article [see also the following Chapter 3 – point (d) - and Chapter 8 of this document].
Q: Do Member States agree with the above analysis made by the Commission services? Which Member States would support exploring further the above described solution based on the "look-through" approach only for payments leaving the EU?
2.2. Joint accounts and other cases of shared beneficial ownership (Q6)
Many Member States supported the idea of having clearer guidance from the Directive on the treatment of joint accounts and similar cases, with a view to ensuring the reporting for all the beneficial owners concerned and to ensuring that the Member States of residence of each of these beneficial owners can make better use of the reporting.
Nevertheless, the consultation of market operators and the position expressed by some Member States raised some doubts about the appropriateness of the Commission services’ suggestion to introduce compulsory rules for a deemed sharing of the interest payment between the beneficial owners, at least as far as the automatic exchange of information is concerned.
An interesting alternative suggestion came from one Member State, under which paying agents established in countries which already apply the Directive in the form of exchange of information would be asked to allow their authorities to make this exchange in a way that provides more details to the State of residence about the features of the payment concerned. This would mean intervening on Article 8 of the current Directive rather than on Article 2 on beneficial ownership (see also the following Chapter 7 of this document).
The Commission services consider that it would be worth exploring further this alternative suggestion with the assistance of the Expert Group, in order to assess its feasibility and the proportionality of the additional obligations on the paying agents in comparison with the possible benefits for the tax administrations.
Q: Do Member States agree with the above analysis made by Commission services? Which Member States would support the Commission in exploring further the alternative suggestion made by one Member State and described above?
3. ARTICLE 3:IDENTITY AND RESIDENCE OF BENEFICIAL OWNERS (Q4,Q5,Q7,Q8)
The consultation with market operators and Member States showed support for the idea of a better alignment of the identification rules of the Savings Taxation Directive with the Customer Due Diligence for AML purposes. However, some experts/Associations express doubts about the feasibility of establishing the permanent address of a beneficial owner on an actual up to date basis. Some experts and Member States also pointed to the problem of managing two systems (for individual transactions above € 15,000 – covered by the AMLD – and those below that ceiling). Certain Member States fear that some of the relevant concepts of the 3rd AMLD could be too vague to be used within the framework of the Savings Taxation Directive and could lead to uncertainties and interpretation problems.
The Commission services consider that the updating and the reliability of the information on the residence of the beneficial owner to be used for the purposes of the Directive could be
improved. The address, if any, which is mentioned on the passport or on the official identity card of the beneficial owner at the moment of his first identification by the paying agent is not necessarily the best indicator of the permanent address of the beneficial owner and of his residence for tax purposes in the tax year when he receives the interest payment. The consultation with market operators also led the Commission services to consider the possibility of slightly refining the Directive as far as the use of the Tax Identification Number and the presumption of residence in a Member State are concerned. Four ideas for possible improvement of the identification procedures are presented below:
a) As far as the permanent address is concerned, one of the Trade Associations represented in the Expert Group made the suggestion to use the “best information available at a payment date”, including information required for AML purposes. The Commission services would like to explore this suggestion further with Member States and market operators in order to define ways (a Comitology procedure?) for identifying the kind of evidence which could be considered as a reliable basis for the updating of the permanent address and in order to set a reasonable calendar for extending, if possible and desirable, the updating procedure to the bulk of existing customer relationships.
b) As far as the residence for tax purposes is concerned, there was a positive reaction from both market operators and Member States about the possibility to ask the paying agents to make reference to those official documents of tax residence which are voluntarily provided by the beneficial owner, rather than to his permanent address if different, for the purposes of the Savings Taxation Directive. The Commission services suggest exploring further this possibility, without requiring the presentation of a certificate of tax residence from all beneficial owners. The Commission services also suggest examining with Member States how some specific categories of individuals (diplomats, civil servants of international organisations, other workers keeping their tax residence in another State than the one where they live because of a special expatriate status) could be encouraged to inform the paying agent about their actual tax residence and how this voluntary practice could be facilitated.
c) Market operators requested clarity about their obligation to ask the beneficial owner for his Tax Identification Number (TIN). The Commission services consider that it would be useful to establish a list of those Member States which provide their resident individuals with a TIN, in order to allow paying agents to request only proof of the date and place of birth to the residents of the other Member States.
d) Many Member States insist on maintaining the special requirement foreseen in Article 2 (3) (b) for beneficial owners holding a passport or identity document issued by a MS (need to present an official certificate of tax residence to prove that their actual residence is outside the EU). It is therefore unlikely that a consensus will be found on an amendment to this requirement, despite the difficulty for the beneficial owners concerned in obtaining valid certificates of tax residence from certain non-EU countries and to provide them timely to the paying agents. Problems can nevertheless arise from this provision when the Directive is applied in the transitional form of the levying of a withholding tax, as the beneficial owner who is actually resident outside the EU could find it difficult to both prevent the levying of this tax and obtain the credit or reimbursement of this tax from a Member State which is not his actual State of tax residence. In order to solve this
problem, the Commission services consider that it would be worth examining two possible alternatives. The first one would consist of amending Article 13, in order to make compulsory, for Member States levying the withholding tax, the procedure of voluntary disclosure set by paragraph (1) (b) of this Article (see also the following Chapter 8 – and the end of the previous Chapter 2.1 - of this document). The alternative would consist in completing Article 14 (1) of the Directive in order to clarify that not only the Member State of actual tax residence, but also the one of deemed tax residence having received the tax revenue of the withholding tax of the Directive could be called, under certain conditions, to reimburse the withholding tax to the beneficial owner who can prove to that State that his tax residence is actually outside the EU.
Q: What are Member States’ views on each of the four points presented above?
4. ARTICLE 4:DEFINITION OF PAYING AGENT
4.1 Transparent entities/“paying agent on receipt provisions” (Q9,Q10,Q11,Q12)
It is certainly worth examining ways to ensure that the Member State of residence of the beneficial owner is also able to apply its tax rules on income obtained by the beneficial owner through its participation in an entity, which is established in another Member State and which can be defined as “transparent” for tax purposes under the legislation of the Member State where the entity is established. Considering these entities as paying agents at the moment “of receipt” of an interest payment, rather than at the moment of the distribution of the payment to participants, would seem appropriate, because such income is normally allocated for tax purposes to the participants of the entity regardless of the date of effective distribution by the entity. The consultations made by the Commission services and the first evidence of the results of the exchange of information under the Directive seem, nevertheless, to suggest the need for some improvements to the current “paying agent on receipt” mechanisms of Article 4(2) in order to better ensure taxation of savings income and remove distortions of competition.
Market operators basically complain about the fact that the agreements signed with the five non-EU third countries for equivalent measures do not impose any obligations on the upstream economic operator which make the payment to the entity. A possible extension of the “paying agent on receipt provisions” to all transparent entities, which receives the support of a number of Member States, would even increase the unequal treatment of EU paying agents in comparison to those established in third countries. The members of the Expert Group also point out that this possible amendment would increase the administrative burden on the upstream economic operators.
The absence of an official “positive list” of the entities covered by Article 4 (2) already makes it difficult and burdensome for the upstream economic operators to apply the rules of the Directive at their level. There is a lack of legal clarity at their level about the fact that the entity receives the interest payment “for the benefit of the beneficial owner”. The upstream economic operators active in the clearing and
settlement of securities are particularly affected by these uncertainties. It appeared from the consultation of market operators that the establishment of a simpler official “negative list” of the entities, which have not to be considered “paying agent on receipt”, would have a limited effect in reducing the uncertainties for the upstream economic operator making the payment to the entity. Market operators would favour the establishment of an official “positive list” of the entities concerned by Article 4 (2), although many of them would not accept any extension of this provision even if such a positive list existed.
Apart from the possible establishment of a positive list at EC level of the entities concerned by the “paying agent on receipt" provision, the Commission services suggest that it would be worth considering complementing (or even replacing) the obligations currently put on the upstream economic operator with additional/alternative provisions for ensuring the compliance of the entities concerned by Article 4(2) with their “paying agent on receipt” obligations. The Swiss rules for implementing the agreement with the EC on taxation of savings provide for a compulsory registration of paying agents with the tax authorities. Once the Member State of establishment has identified the kind of entities in its territory which have to be covered by the “paying agent on receipt” provisions, the compulsory registration of these entities could allow the Member State to monitor the compliance of these entities with the Directive. If these mechanisms prove to be successful then the involvement of the upstream economic operators could become less necessary.
Needless to say, the “paying agent on receipt" provisions would continue not to be applied to those collective investment vehicles whose income deriving from interest payments is made subject to the Directive under the rules of Article 6(1) (c) and (d). Q: Would Member States be prepared to establish a positive list of the kind of entities covered by the “paying agent on receipt” provisions and to keep this list updated through e.g. Comitology procedures? If yes, how do Member States evaluate the idea of a compulsory registration with the tax authorities of the entities belonging to one of the categories of the list, in order to ensure a better monitoring of their “paying agent on receipt” obligations under the Directive and possibly of their other domestic tax obligations?
4.2 Non-charitable Discretionary trusts and Foundations and other legal persons or arrangements having a comparable status (Q13)
The Commission services consider that it would be worth ensuring neutrality between an interest payment received by an individual directly [or through a “transparent” entity subject to the “paying agent on receipt provision”, or through a collective investment vehicle considered in Article 6(1) (c) and (d)] and the same payment channelled through discretionary trusts (and similar arrangements) and foundations (and other kind of legal persons which are not subject to normal business taxation but at the same time cannot be defined as “transparent” for tax purposes).
This need obviously arises only for those trusts/arrangements and foundations or legal persons which are not set up exclusively for charitable purposes.
In the Working document of 14 March 2007 for the Expert Group, the Commission services have suggested a possible solution based on the extension of the provisions of Article 4(2) to discretionary trusts and legal persons whose income is not taxed on a yearly basis and for which the AML provisions cannot help to identify the beneficiary. Despite the support expressed by some Member States for the suggestion, other Member States as well as most experts and Associations indicated that this solution would be neither practical nor effective, and that it would create an excessive administrative burden on the upstream economic operators for reporting interest payments made to these trusts and legal persons to the tax authorities [or levying a withholding tax under Article 11(5)].
As far as the trusts are concerned, it has also to be considered that in a number of Member States the trust cannot be the legal holder of an account, which is normally held in the name of the trustee. Moreover, some of the objections made by market operators to a solution based on the “paying agent on receipt” provisions deserve careful consideration by Member States, because applying the Directive at the moment when the interest payments are made to a discretionary trust (or a foundation) could be premature and would not necessarily provide the correct information regarding who is the beneficiary subject to income tax in his State of residence.
Given the above constraints, the Commission services would consider it worth exploring an alternative solution to ensure neutrality for interest payments channelled through non-charitable discretionary trusts or foundations or other comparable arrangements and legal persons. This solution was in some way anticipated in question 15 of the Working document presented by the Commission services to this Working Party already on 25 October 2005 (accessible through the TAXUD website
http://ec.europa.eu/taxation_customs/taxation/personal_tax/savings_tax/savings_dire ctive_review/index_en.htm) and discussed by the Working Party at the meeting of 14 November 20051. It would consist of applying the Directive at the moment of the first distribution of cash assets or other liquid assets (for instance, listed securities with an official market value at the date of distribution) by the non-charitable trust/arrangement or foundation/legal person to their actual beneficiaries or participants. This first distribution would be deemed to be made of interest income up to the amount of the interest payments received by the trust/arrangement or the legal person (and not yet taken into consideration for the same purpose) in the previous, let’s say, five tax years (to take account of the normal extent of the statute of limitations for the assessment of income taxes and the keeping of books). The non-charitable discretionary trust/arrangement or foundation/legal person would therefore have paying agent obligations under the Savings Directive at the moment of the distribution of its assets (and up to the amount corresponding at the interest payments received) when the beneficiaries/participants identified at that moment
1 The « Fédération des Experts Comptables Européens – FEE » showed support for such a solution in
paragraph 39 of its written contribution of 13 March 2008, which is accessible through the same website of DG TAXUD.
include individuals who are resident in a Member State different from the one where trust/arrangement or the foundation/legal person/concerned are established2.
Provided that the above mechanism is limited to the distribution of assets, and that it is not extended to the payment of dividends insofar as dividends would be kept out of the scope of the Savings Directive (see following Chapter 6 of this document), it could be considered whether to extend the same mechanism to the distributions of cash or other liquid assets made by “non-transparent” companies which are not those collective investment vehicles under the rules of Article 6(1) (c) and (d). This could actually result in a more effective way of preventing the circumvention of the Savings Directive through “instrumental” or “screen” companies established in the EU than a “look-through” approach at the moment of the payment of interest to the company.
Besides the information relating to the interest payment incorporated in the distribution of assets, the non-charitable trust/arrangement or foundation/legal person would report to the tax authorities the share of income tax it actually paid on that interest income with reference to the tax year when it received the interest payment. This would allow the tax authority of the Member State of residence of the beneficial owner to take account, if appropriate, of this income tax when assessing the income tax due by the beneficial owner. If agreeable to the Council, such income tax already paid at the level of the non-charitable trust/arrangement or foundation/legal person could also be taken into account when such an arrangement or entity applies the Savings Directive in the form of a withholding tax, in the Member States which are transitionally allowed to implement the Directive in this form.
The modalities for taking into account the income taxes previously paid at corporate level should obviously be adjusted if the above described mechanism is extended to distributions of assets made by companies, in order to allow coordination with any agreed solution at bilateral or EU level in the field of payment of dividends.
An appropriate monitoring of a mechanism based on paying agent obligations at the moment of the distribution of assets would request not only the compulsory registration with the tax authorities of the paying agents concerned (as suggested for other paying agents in the previous paragraph 4.1), but also accounting obligations for these paying agents in order to ensure that the interest payments received are followed until the moment of the assets' distribution. For discretionary trusts and similar arrangements, clear-cut criteria for identifying the actual country of establishment of the trust/arrangement should also be defined, on the basis of the experience of those Member States which have developed such criteria within their own law and legal practice.
Q: Which Member States would encourage the Commission services to pursue their examination of the feasibility of the above described mechanism attributing paying agent obligations to non-charitable trusts/arrangements and foundations/legal persons at the moment of distribution of cash or other liquid assets? How many would consider this mechanism appropriate also for similar distributions made by "non-transparent" companies which are not collective investment vehicles?
2 A parallel amendment should be made to Article 6(4) of the Savings Directive in order to include in the
4.3. Preventing the deliberate routing of payments outside the EU (Q14, Q15) As consultations have revealed, there is support from a number of Member States on the idea of including specific provisions in the Savings Directive to prevent the risk of deliberate routing of interest payments and the fictitious establishment of customer relationships - at the request of the beneficial owners – through branches that EU paying agents have established outside the territory of the EU. Also in the view of some members of the Expert Group, there would be cases where it is legally and practically feasible to impose an obligation on the head office established within the EU to report (or to withhold) on interest payments made through non-EU branches, provided that the client has not opened the account in direct contact with the non-EU branch without informing the head office in the EU.
Similar solutions have recently been introduced in the United Kingdom regarding residents’ accounts held in overseas branches of British banks or foreign banks operating in the UK. Nevertheless, transposing at EU level this experience, as an additional element of the Savings Directive, does not appear easy or practical at this stage, before more in-depth discussion has taken place between Member States.
The main doubt expressed by those Member States and market operators that do not support this solution as an obligation at EU level relates to its problematic compatibility with the bank secrecy provisions in third countries. Other significant concerns refer: (i) to the risk of affecting the competitiveness of financial intermediaries having their head office in the EU; (ii) to the risk of distorting competition between financial intermediaries depending on the kind of international structure adopted by them (branches rather than subsidiaries); and (iii) to the risk of encouraging an outflow of capital outside the EU and outside the network of financial intermediaries having a presence in the EU.
Faced with these concerns, the Commission services suggest a “three steps” approach to prevent the deliberate routing of interest payments outside the geographical scope of application of the savings taxation measures, to be pursued in parallel with discussions with other financial centres (Hong Kong, Macao, Singapore, Bermuda) aimed at extending such geographical scope:
a) In the short term, the Commission services would suggest incorporating in Article 4 of the Directive an obligation for all Member States to implement the same anti-abuse measure which has been foreseen by Luxembourg in its guidelines for the application of the current text of the Savings Directive. As already described by the Commission services in their Working Document of 14 March 2007 for the Expert Group, these Luxembourg guidelines provide that, when a paying agent established in Luxembourg routes an interest payment through a non-EU country for the benefit of a beneficial owner, who is an individual with residence in another Member State, the payment is still considered within the scope of the Directive. Such a provision would probably not solve the problem of relocation of the customer relationship outside the EU (or the current geographical scope of the savings taxation measures), but would set a term of reference for the good conduct of paying agents within the EU.
b) At the same time, it would be useful to open a discussion allowing Member States to share their experiences and views on measures such as those implemented at national level by the UK (see above). Such a discussion would allow progress in the mutual understanding between Member States, ensure the compatibility of the measures taken at national level with the EU fundamental freedoms and provide a basis for future coordinated action to tackle the problem of the relocation of savings investments in order to circumvent tax rules.
c) In a medium-long term perspective, the Commission services would suggest to explore with Member States and market operators the possibility of introducing, at EU level, certain general reporting obligations for all financial intermediaries established in the EU regardless of their structure (and thus for instance applicable also to branches and subsidiaries of intermediaries having the head office or the holding company outside the EU). These reporting obligations would in principle be unrelated to the paying agent function under the Savings Directive and could, for instance, cover any significant (15000 euros? A multiple of this amount?) outflows or inflows of capital (with the possible exclusion of those justified by commercial reasons) to and from non-EU territories (at least those which do not apply equivalent measures to the Community acquis in the area of cooperation between tax authorities), realised by customers who are individuals resident in the EU according to the identification rules of Article 3 of the Savings Directive. Where the customer would not be resident in the jurisdiction in which the financial intermediary is established and to which it reports the information, use should be made of the Mutual Assistance Directive (Directive 77/799/EEC) and, more particularly, of the mechanism for automatic exchange of information provided under that Directive. It could also be considered whether the financial intermediaries should be obliged to report to the tax authorities information available to them about the existence of possible customer relationships outside the EU (and outside the territories applying measures equivalent to the Savings Directive) for their individual customers.
An extended application of these provisions could significantly impact the activity of financial intermediaries established in the EU, so a specific impact assessment could be necessary and this would require appropriate time and resources. Such a substantial impact assessment could be justified only if and when all Member States would be available to examine the possible introduction on their territory of such provisions.
Q: What are Member States’ views about each of the three possible actions described above to cope with the problem of relocation of interest payments and savings investments in order to circumvent tax rules?
5. ARTICLE 6: DEFINITION OF INTEREST PAYMENT
5.1. Treatment of structured products equivalent to debt claims
The text of Article 6 (1) (a) of the Savings Directive is broadly inspired by the Article 11 dealing with interest in the OECD Model Convention. As a consequence, having in
mind the commentary 21.1 to Article 11 of the Model Convention, the Commission services had suggested to experts and Member States to examine if a reference to the “substance over form” principle in the Directive would have been useful in order to prevent possible distortions of competition between debt claims which are certainly covered by the current scope of the Directive and other financial products which are perceived as equivalent by the investors.
On the “substance over form” principle as such, experts think that a simple reference to this concept without further specifications could create more problems than it solves, because that concept as such would not provide legal certainty to paying agents and would therefore create confusion.
Nevertheless, some very useful suggestions can be found in the written contributions provided by the experts and Trade Associations:
a) One expert suggested identifying structured products which can be considered as equivalent to debt claims as those financial instruments whereby the economic performance relating to underlying assets is exchanged/swapped against interest. This technical definition could provide more clarity to financial specialists than a generic reference to the “substance over form” principle.
b) A less technical approach was suggested by the « Fédération des Experts Comptables Européens – FEE » in paragraph 54-57 of its written contribution of 13 March 2008, which is accessible through the website of DG TAXUD: http://ec.europa.eu/taxation_customs/taxation/personal_tax/savings_tax/savings_directive_revi ew/index_en.htm. FEE suggests extending the definition of interest payment to “any revenue arising from the investment of capital where the return is fixed ex
ante and the substance of the return arising from a transaction is similar to any interest income” and complementing this provision with a positive list of
the financial products concerned, to be maintained and updated through appropriate Comitology procedures with the agreement of Member States.
.
Q: What are Member States’ views on the two above described approaches for defining interest payments under a “substance over form” principle?
5.2. “Wrapping” of interest generating securities in pensions, life insurance or annuity contracts (Q17, Q18)
When market operators were consulted on the impact of the exclusion of some insurance contracts from the scope of the Savings Directive, only a few replies were received. While some experts (notably in the field of collective investment vehicles) are convinced that the exclusion of life insurance products leads to distortions, the three Trade Associations of the insurance sector replied that they haven’t found any evidence of competition being distorted because of exclusion of their contracts from the Directive, and that competition between UCITS and life insurance is mainly driven by other factors. One of these Associations concluded, on the basis of data for the year 2005 provided in the reply to the quantitative questionnaire, that competition
arises at domestic level and not at a cross-border level [Except for the United Kingdom (9.81%), Ireland (36.48%) and Luxembourg (90.61%), the proportion of the cross-border premiums paid in 2005 with respect to the total premiums paid in that country in 2005 is below 2.5%].
As far as pensions are concerned, the European Federation for Retirement Provision (EFRP) targeted its reply to second pillar (occupational) pension schemes to conclude that in those schemes the beneficial owner of the assets is not the individual, but the pension fund and the cross-border activity is very limited at present. The EFRP also points out that in the third pillar (individual schemes) the difference between long term savings and pensions may be difficult to make, but no conclusion is provided.
Whilst a few Member States were in favour and a few against, most of them expressed their reservations to an extension of the scope of the Directive to benefits from life-insurance, pension and annuity contracts before extensive research and quantitative analysis is made. They also said that one should rely on the analysis made by market operators to determine if such a distortion exists.
Unfortunately, as mentioned before, the scarce data provided by market operators do not allow any conclusion in this respect.
In these conditions, it seems difficult to propose the inclusion, in the scope of the Savings Directive, of the benefits from those life insurance and pension (II and III pillars) contracts which are not comparable alternatives to interest bearing products. Member States may, however, find it useful to establish a more advanced administrative cooperation in this respect e.g. under the Mutual Assistance Directive. If Member States consider it worth following the suggestion to adopt a “substance over form” principle for defining interest payments, along the line of the approach described under point (b) of previous Chapter 5.1, there could nevertheless be room for Member States to consider the possible inclusion of some insurance, pension and annuity contracts, when it is considered appropriate within a Comitology procedure, in the “positive list” of financial instruments to be assimilated to debt claims. The Commission services would like to underline the adoption by the Commission on 28 November 2007 of a proposal for a Council Directive aimed at modernising and simplifying the complex VAT rules for financial and insurance services and securing a level playing field in the pan-EU market for these services as far as VAT is concerned. The proposed legislative instrument contains a rather clear definition of the insurance products and the other financial products. In particular, the proposal considers that “financial deposit” includes “insured pensions and annuities where the
mortality or longevity risk covered is merely ancillary”. Even if the purpose of the
provision concerns the exemption of these products under VAT regulations, this definition could be helpful for the purpose of complementing the list of products covered by the Savings Directive. An approach based on the “substance over form” principle, and on a “positive list” of financial instruments concerned by the Savings Directive would allow Member States to have a flexible and fast tool to react, through the Comitology procedures, to possible future evidence of arising distortion of competition between the “insured pensions and annuities where the mortality or
longevity risk covered is merely ancillary” and those products which are clearly
covered by the Savings Directive, such as collective investment vehicles (see following Chapter 5.3 of this document).
Q.: What are Member States’ views on the idea of extending the “substance over form” principle for defining interest payments for the purpose of the Savings Directive, where appropriate, also to the benefits from selected categories of insurance, pension and annuity contracts where the mortality or longevity risk covered is merely ancillary?
Q.: How many Member States take the view that more advanced administrative cooperation in the field of exchange of information on “out” payments from any life insurance and pension scheme should be considered in the forthcoming review of the Mutual Assistance Directive?
5.3. Collective investment vehicles and the scope of the Directive (Q19, Q20, Q21)
The consultation showed considerable support from many Member States for a possible extension of the current scope of the Savings Directive to interest income channelled through non-UCITS and for better clarity in the definition of those “undertakings for collective investment which are established outside the [EU] territory”. One Member State was, nevertheless, against any amendment in this field, and another Member State took a reserved position until some evidence is provided to demonstrate that the markets have been distorted by the current exclusion of non-UCITS from the scope of the Savings Directive. However, it is apparent from the consultation of market operators that providing actual evidence in this field would be quite a hard task, because UCITS and non-UCITS are almost never “perfectly” comparable. It is therefore practically impossible to ascertain at statistical level when the choice between one or the other of these products has been mainly driven by the intention to circumvent the Savings Directive. Nevertheless, some experts drew attention to anecdotal evidence that both products are offered as comparable alternatives to the EU investors, and noted that the distinction made for the purposes of the Savings Directive is illogical: (i) both categories of investment funds can invest in debt claims; (ii) non-UCITS are investment vehicles monitored by the national authorities of the Member State where they are established; and (iii) non-UCITS could be used as an intermediate vehicle for investing in UCITS.
A distortion of competition can also arise within the category itself of non-UCITS, depending on whether they are incorporated or not. Incorporated non-UCITS are at present outside the scope of the Savings Directive, while most unincorporated non-UCITS choose to be treated as UCITS (or are even obliged to do so by their Member State of establishment) in order to avoid the “paying agent on receipt” obligations of Article 4 (2) and (3) of the Directive. The main representative Trade Association at EU level in the field of collective investment vehicles opposes the elimination of the distinction between UCITS and non-UCITS within the Savings Directive, if such an amendment is not accompanied by an extension of the scope of the Directive to the benefits that individuals can obtain through competing life-insurance contracts (notably the “unit-linked” contracts) and structured financial products. This position results in a further encouragement for the Commission services to promote a “substance over form” approach for analysing these financial instruments, as explained in the previous Chapters 5.1 and 5.2.
The same Trade Association is also opposed to any definition of collective investment vehicles for the purposes of the Savings Directive which is not based on already existing
definitions in the EU legislation, like the one contained in Article 23 (1) A (d) of the Life Insurance Directive 2002/83/EC (recast version)3 or the one contained in Article 2 (1) (h) of MiFID 2004/39/EC4. The Commission services, nevertheless, find that these definitions are not detailed enough to ensure a level playing field for collective investment vehicles established inside and outside the EU.
The Commission services would therefore suggest reflecting further on a definition of collective investment vehicles, for the purposes of the Savings Directive, which can be shared with other parties outside the EU and which ensures that interest income channelled through these vehicles is fairly taken into account independently from their geographical location. If a non equivocal concept can be fixed for undertakings established outside the EU, the Commission services would consider it logical to make reference to the same concept for undertakings established inside the EU.
The OECD Model Agreement on Exchange of Information on Tax Matters released on 18 April 2002 (hereinafter referred to as the 2002 OECD Model Agreement) provides a definition for tax purposes of collective investment funds or schemes. As defined in Article 4 (1) (h) of the 2002 OECD Model Agreement "the term “collective investment fund or
scheme” means any pooled investment vehicle, irrespective of legal form. The term “public collective investment fund or scheme” means any collective investment fund or scheme provided the units, shares or other interests in the fund or scheme can be readily purchased, sold or redeemed by the public. Units, shares or other interests in the fund or scheme can be readily purchased, sold or redeemed “by the public” if the purchase, sale or redemption is not implicitly or explicitly restricted to a limited group of investors." This concept is further
clarified in commentary 30 (as completed by commentaries 24 and 27) to the 2002 OECD Model Agreement.
The Commission services consider that this OECD definition of collective investment fund or scheme is a good basis for a possible amendment to Article 6 (1) (c) and (d) of the Savings Directive, allowing it to go beyond the current reference to the UCITS Directive with its implicit limitations. Refinements to this definition could possibly be useful not only to ensure the coverage of those investment funds whose units are sold through a private placement, but also to allow a clear distinction between the investment vehicles covered by Article 6 of the Savings Directive and the entities which are “paying agent on receipt” under Article 4 of the same Directive as well as the entities and arrangements which could be possibly concerned by an amendment to the Directive along the lines of the one described in Chapter 4.2 of this document.
3 “
Article 23: Categories of authorised assets
1. The home Member State may not authorise assurance undertakings to cover their technical provisions with any but the following categories of assets:
A. investments …
(d) units in undertakings for collective investment in transferable securities (UCITS) and other investment funds;”
4 « Article 2 : Exemptions
1. This Directive shall not apply to: …
(h) collective investment undertakings and pension funds whether coordinated at Community level or not and the depositaries and managers of such undertakings;”
Q.: How many Member States would support the Commission services in working further on a definition of collective investment vehicle for the purposes of the Savings Directive on the basis provided by the 2002 OECD Model Agreement?
5.4. Option to annualise interest (Q22, Q23)
Experts or Member States who answered this question were not aware of any distortion arising from the annualisation provision contained in the Savings Directive. They saw no reason for annualisation to be compulsory, even for Member States that already apply the same method on interest payments made to their resident customers for domestic tax purposes.
5.5. “Home country rule” for collective investment vehicles
The Commission services asked market operators and Member States how to improve the drafting of the Directive to better clarify the use of the “home country rule” as far as it pertains to investment funds [definition of interest payment under letter d) and the 15%/ 40% thresholds].
Some market operators said that common guidance across Member States would be sufficient, but others said, as did most Member States, that Article 6 (8) of the Directive should be modified to ensure the application of this principle.
One of the Trade Associations represented in the Expert Group suggested in particular that Article 6 (8) could be detailed to permit a range of acceptable measures for the weighting of assets, for instance, by reference to investment objectives or the average of assets at the beginning and at the end of the fund's accounting period. With regard to Article 6 (1), the reporting (or final) paying agent should be entitled to rely on information provided by the investment fund and/ or its local administrators, without the need to re-calculate or the ability of the State of the paying agent to challenge that information.
The Commission services consider that a reliable implementation of the “Home country rule” could be built on these elements, in combination with an agreed list of reliable data providers, as exists in the guidelines of some Member States for implementing the Directive as well as in the Swiss guidelines for implementing the Agreement with the EC on taxation of savings. In particular, data providers selected for the list should be capable to ensure the reliability of data referring to collective investment vehicles established outside the EU. The establishment and the periodical updating of such an agreed list could be made through a Comitology procedure. Q.: How many Member States would support the above suggested slight amendments to Article 6 of the Savings Directive in order to provide more clarity on the application of the “Home country rule” for collective investment vehicles?
6. APPROPRIATE FORMS OF COOPERATION FOR OTHER PRODUCTS NOT COVERED BY ARTICLE 6 OF THE SAVINGS TAXATION DIRECTIVE
In the ECOFIN meeting on 4th March 2008, some Member States expressed their wish to extend the scope of cooperation between tax authorities to dividends and capital gains. Although these issues were neither addressed by the Commission services’ working document of 14 March 2007 nor discussed with the Expert Group, the Commission services would like to get the preliminary views of Member States at technical level on the suitability of possible solutions in this respect.
Exchange of information seems the most appropriate instrument for dividends and capital gains in order to prevent the unlawful non-reporting of these types of income by taxpayers in their states of residence, resulting in loss of revenue for Member States. As a matter of fact, dividends come from benefits which are normally subject to business taxation at the level of the company, and capital gains are taken into account by Member States for taxation purposes in very different ways. Appropriate conditions for the levying of withholding taxes on behalf of the country of residence of the taxpayer would be difficult to find in these conditions. Therefore, if cooperation had to be established through an extension of the scope of the Savings Taxation Directive, it would be advisable not to grant transitional measures in the form of withholding taxes in relation to these payments.
Possible alternatives to the inclusion of these payments in the Savings Directive could be envisaged at the Community level by a separate legal act covering automatic exchange of information on these payments or by the extension of Member States’ obligations under the Mutual Assistance Directive (Directive 77/799/EEC).
In the context of choosing the most appropriate legal instrument to address the issue of administrative cooperation in this field, the external dimension of any measure agreed at EU level should be kept in mind. As far as dividends are concerned, for instance, any form of cooperation based on the “paying agent principle” could include in its scope not only payment of dividends made by companies established in the EU but also payments made in the EU of dividends distributed by companies established outside the EU.
Q.: How many Member States take the view that an extension of the scope of the Savings Taxation Directive is an appropriate solution for cooperation between tax authorities in order to ensure effective taxation of dividends and capital gains? Do these Member States take the view that such an extension of the scope of the Savings Directive should form the part of the current review process or should consultation take place without undue haste independently from the preparation of the first report on the functioning of the Savings Directive?
Q.: How many Member States would prefer using a different legal instrument for the same purpose and, if so, which one?
7. ARTICLE 8:POSSIBLE IMPROVEMENTS TO THE INFORMATION REPORTING (Q25)
Consultations with the Member States revealed that there is no wide support for the idea of complementing the reporting with information about which quarter of the tax year the interest payments took place, even if this measure could increase the quality of the information. A number of market operators represented in the Expert Group confirmed that it would be
burdensome and costly for paying agents to provide this information on a systematic basis, since the reporting systems are not structured to record such information and this would represent a major system upgrade.
Based on preceding comments, the Commission services do not consider it appropriate to pursue their reflections on an amendment to the Savings Directive of this kind. However, they do not exclude having further discussions with Member States about possibly encouraging paying agents to provide, on a voluntary basis, additional elements already available to them which could allow a better use of the information by the State where the beneficial owner is resident, notably when there is a difference between the tax year of this State and the tax year of the State of the paying agent. For interest payments made to a resident of the UK, for instance, and only for these payments, paying agents established in the other Member States could be encouraged to separate, on a voluntary basis, the payments made between 1 January and 5 April (end of the tax year in the UK) from those made between 6 April and 31 December. The UK could in this case reciprocate by encouraging its paying agents, on a voluntary basis, to distinguish when payments are made before and after 31 December within the UK tax year.
Apart from the point on joint accounts mentioned in the previous Chapter 2.2 of this document, there is nevertheless another element of the provisions on information exchange to which the Commission services would like to draw the attention of the Member States in view of possible amendments to the Savings Directive. It relates to the present drafting of Article 8 (2) (b) and (c) of the Directive, which does not oblige Member States to distinguish between amounts referring to the interest element of a payment from the amount referring to the full proceeds from a sale, redemption or refund or from the full amount of a distribution. The Commission services consider that this lack of detail, notably in the case of point (b), makes the information exchange much less usable for the State of residence of the beneficial owner and increases its administrative burden in a way which is disproportionate to the burden which the paying agent and its State of establishment would have if providing the additional detail. In addition, this lack of detail makes it much more difficult for the Commission services to measure the effectiveness of the Directive.
Q.: How many Member States agree with the Commission services that it would be worth reflecting on an amendment to Article 8 (2) (b) [and possibly also to Article 8 (2) (c)] in order to distinguish the information referring only to the interest element of a payment from the information including other elements of income or capital?
8. ARTICLE 13:EXCEPTIONS TO THE WITHHOLDING TAX PROCEDURE (Q26)
In relation to the certificate procedure under Article 13 (1) (b) of the Savings Directive, neither the members of the Expert Group nor the Member States reported any specific problems.
Nevertheless, the Commission services find that this procedure is not really in line with the transitional character of the withholding tax regime. The alternative procedure of voluntary disclosure allows a tax administration to become acquainted with the automatic exchange of information, which is the ultimate aim of the Directive.
In addition, the explanations provided by the Commission services in the previous Chapters 2.1 (last bullet) and 3 (point d) show that the abandonment of the certificate procedure in
favour of the voluntary disclosure procedure of Article 13 (1) (a) would be beneficial for ensuring the respect of the Treaty freedoms in particular cases.
Q.: What are the views of the two Member States which have not implemented the voluntary disclosure procedure of Article 13 (1) (a) on the above reflections made by the Commission services?
