The forthcoming revision of the EU Directive on Taxation of Savings: Its impact on Switzerland and i

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The forthcoming revision of the EU Directive on
Taxation of Savings Its impact on Switzerland
and its banks

• Association of Foreign Banks
• in Switzerland
• Geneva, 17 November 2008

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Contents of the presentation

• Background and history
• Principal proposed amendments to the Directive
• The Swiss-EU Agreement
• Calendar, perspectives and concluding observations

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A. Background History

• Original goal of Directive 2003/48 (EUSD) is
• to enable savings income in the form of
  interest payments made in one Member State to
  beneficial owners who are individuals resident
  for tax purposes in another Member State to be
  made subject to effective taxation in accordance
  with the laws of the latter Member State
  (Article 1).

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A. Background History

• Directive adopted on June 3, 2003.
• Applied as of July 1, 2005 (by 27 Member
  States),EUSD is based on the automatic exchange
  of information between Member States. During a
  transitional period with no specific expiry
  date Austria, Belgium and Luxembourg may apply
  a withholding tax and share revenues with Member
  States (instead of providing information).

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A. Background History

• Switzerland (plus Andorra, Liechtenstein, Monaco
  and San Marino) to apply equivalent measures,
  as of July 1, 2005.
  
• Ten dependent and associated non-EU territories
  (Anguilla, Aruba, the British Virgin Islands, the
  Cayman Islands, Guernsey, the Isle of Man,
  Jersey, Montserrat, the Netherlands Antilles as
  well as the Turks and Caicos Islands) to apply
  equivalent measures, as of July 1, 2005.

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A. Background History

• Article 18 EUSD provides for periodic review of
  its operation.
  
• Limited data availability (2005/2006) makes a
  detailed quantitative analysis of EUSD difficult.

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A. Background History

• Acceleration of the review, in March 2008,
  following the Liechtenstein / Germany events
  succession of Commission working groups and
  consultation with industry expert groups lead to
  Commission report of September 15, 2008.
• November 13, 2008 adoption by the Commission of
  the proposal amending EUSD, after its first three
  years of operation.

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A. Background History

• Review process indicated that
• Coverage of EUSD is not as wide as intended
• There are many loopholes (in both automatic
  exchange of information and withholding tax)
  
• Results of information exchange system are
  debatable.

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A. Background History

• Specific problems identified by the Commission
• Use of intermediary structures
• Different treatment of investment funds
  (non-authorized UCITS)
  
• Use of comparable products to debt claims
  (e.g., life insurance contracts)
  
• Identification of beneficial owners
• Use of conduit vehicles in third countries
• Lack of statistics from Member States.

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A. Background History

• The international dimension of EUSD review was
  also carefully assessed how best to prevent
  relocation of savings to non-EU countries as a
  result of a reinforced EUSD.

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B. Principal proposed amendments to the
Directive

• Definition of savings income (Article 6)
• The objective is that EUSD covers substantially
  equivalent income (to interest payments) from
  certain innovative financial products and from
  certain life insurance contracts. Savings income
  would thus include securities which are
  equivalent to debt claims (capital is protected
  up to 95 of total capital invested).

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B. Principal proposed amendments to the
Directive

• Expanded definition of savings income (Article
  6)
  
• Establish symmetry in treatment of UCITS and
  non-UCITS investment funds
  
• Inclusion of certain life insurance contracts.

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B. Principal proposed amendments to the
Directive

• Extension to legal entities(Articles 1 2)
• Broadening the scope of EUSD to cover all
  payments to legal entities and arrangements held
  by individuals in
  
• other Member States, or
• non-EU jurisdictions.

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B. Principal proposed amendments to the
Directive

• Extension to legal entities(Articles 1 2)
• Paying agents in the EU who are subject to EU
  anti-money laundering rules to apply a
  look-through approach when making payment to
  intermediary structures established outside the
  EU (new Annex I Cf. Point 2 as regards
  Switzerland).

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B. Principal proposed amendments to the
Directive

• Extension to legal entities(Articles 1 2)
• New Annex I also contains a list of several types
  of legal entities.

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B. Principal proposed amendments to the
Directive

• Definition of beneficial owner(Article 2)
• As a consequence of the expanded scope of EUSD to
  legal entities, there is a redefinition of the
  concept of beneficial owner (Article 2.1(b)).

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B. Principal proposed amendments to the
Directive

• Definition of paying agent upon
  receipt(Article 4)
  
• New provisions intended to ensure consistent
  application
  
• To replace existing approach (upstream economic
  assessment) by a treatment based on a positive
  definition of the intermediary structures
  
• New approach would apply to certain types of
  entities (a positive list is included in a new
  Annex III), such as certain trusts and
  partnerships.

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C. The Swiss-EU Agreement

• Switzerland does not participate in the automatic
  exchange of information system
  
• Switzerland agrees to introduce a withholding tax
  system on interest income paid or credited by a
  paying agent (bank) established in Switzerland to
  a beneficial owner (an individual) with a tax
  domicile in one of the EU Member States.

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C. The Swiss-EU Agreement

• Key provisions
• Progressive withholding tax rates 15, 20 and
  35 (as of July 2011)
  
• 75 of withholding tax income to go to the
  Member State when tax domicile is established
  
• 25 remains in Switzerland
• Voluntary tax declaration is possible.

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C. The Swiss-EU Agreement

• Key provisions
• If there is tax fraud and the like, mutual
  administrative assistance between Switzerland
  and Member State applies
  
• No withholding tax on payments of dividends,
  interests and royalties between parent-subsidiary
  companies
  

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C. The Swiss-EU Agreement

• Key provisions
• At least every three years, consultation between
  Switzerland and the EU when Parties have acquired
  sufficient experience with the functioning of the
  Agreement with a view to improving its
  operation (Article 13)
• Agreement is accompanied by a Memorandum of
  Understanding (MOU), including a provision
  regarding future negotiations between the EU and
  other important financial centres

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C. The Swiss-EU Agreement

• Financial returns
• 2006 536 Mio CHF withheld 402 Mio CHF
  transferred to Member States
  
• 2007 653 Mio CHF withheld 489 Mio CHF
  transferred to Member States
  
• NB 63,000 individuals have intended to file
  (voluntary) tax returns
  

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D. Calendar, perspectives and concluding
observations

• Calendar
• ECOFIN Council meeting of December 2, 2008
• Review of Commission proposal by Member States
  experts (2009)
  
• Continuation of discussions / negotiations with
  certain Asian countries (first half of 2009)
  
• Opening of exploratory talks with other third
  countries notably Switzerland (first half of
  2009).
  

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D. Calendar, perspectives and concluding
observations

• Perspectives
• A significant task ahead
• Relevance and impact of current tax climate
• Germany and France announced intention to achieve
  greater fiscal transparency (October 21, at OECD
  gathering)
  
• Could there be an accelerated drive towards an
  information exchange system as sole system under
  the amended EUSD ?

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D. Calendar, perspectives and concluding
observations

• Expected reactions from Member States
• France, Germany
• Austria, Belgium and Luxembourg
• UK
• Other Member State groupings

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D. Calendar, perspectives and concluding
observations

• Third-country positions
• Asian countries
• Dependent and associated non-EU territories
• Non-EU countries Liechtenstein, Monaco, Andorra
  and San Marino
  
• Switzerland

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D. Calendar, perspectives and concluding
observations

• Concluding observations
• In general
• Will there ever be an amended EUSD?
• Looking at the review process, is time of the
  essence?
  
• Will the proposed amendments be able to properly
  close the current loopholes?
  
• Will the review of the EUSD proposal cause
  disruption to the coexistence system (exchange
  of information and withholding tax)?

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D. Calendar, perspectives and concluding
observations

• As for Switzerland
• Why Switzerland should care about the forthcoming
  EUSD proposal.
  
• The system established by the Swiss-EU Agreement
  may be called into question in the medium term.

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D. Calendar, perspectives and concluding
observations

• What could be the Swiss response, in the event
  the EU decides to review the operation of the
  Swiss-EU Agreement and, subsequently, propose a
  renegotiation of the Agreement?
• Beyond compliance costs, the impact of an amended
  EUSD on Swiss banks will be considerable.
  

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D. Calendar, perspectives and concluding
observations

• Final remark
• An amended EUSD, followed by a possible
  renegotiation of the existing Swiss-EU Agreement
  may well represent the most important development
  in Swiss-EU bilateral relations in the coming
  five years.

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