New rules crack down on tax havens

 

By Lucy Warwick-ChingPublished: June 3 2005 13:46 | Last updated: June 3 2005 13:46Study a map of the globe and you could miss them entirely. But discreet tax havens such as Guernsey,Jersey and the Isle of Wight, will become the focus of Inland Revenue tax avoidance legislation whenthe EU Savings Directive takes effect from next month.Under the directive, financial institutions in EU member states and some neighbouring territorieswill be required to hand over to the relevant tax authority information about savings incomereceived by EU individuals not resident in the country where the account is held.“The objective of the directive is to ensure that information on deposits is communicated to the taxauthorities,” says Charlie Hill, tax investigations officer at Grant Thornton. “The information canthen be compared with what has been declared on their domestic tax returns and the tax inspectorscan keep an eye on who’s paying the right amount of tax, and more importantly, who isn’t.”For investors with nothing to hide (those who already declare everything to the taxman) there willbe nothing to worry about under the new rules. Administrators have agreed to pick up any additionalcosts involved and there is not expected to be much extra paper work.“It is only those people that have been hiding money from the taxman that will be affected,” saysHazel Weston, tax adviser at the Investment Management Association. “We are expecting some people tomove their money farther afield [out of the reach of the Savings Directive] to places like Singaporeor Bermuda.”The rules will apply to all EU member states, certain dependent and associated territories of memberstates, including the Isle of Man, the Channel Islands and the British Virgin Islands.For a transitional period, Belgium, Luxembourg, Austria will be allowed to apply a withholding taxinstead of providing information, at a rate of 15 per cent for the first three years (2005-2007), 20per cent for the subsequent three years (2008-2010) and 35 per cent from 2011 onwards. Switzerland,Jersey, Guernsey and the Isle of Man will be able to continue to apply the withholding tax optiongoing forward.The launch of the Savings Directive signals the start of the EU’s assault on tax evasion and isaimed at uncovering and taxing interest earned on the hundreds of billions in savings held bycountries outside their home countries. Grand Cayman, in the Caribbean, for example, looks after$1,000bn in private deposits while Guernsey, 80 miles from the south coast of England holds around£70bn in assets.But, despite already being six months late, the rules are still expected to take some time to takeeffect.“We expect some teething problems because all the countries will have different research methods,”says Mona Patel at the IMA. “But we expect there to be a bit of an amnesty while countries work outwhat they need to do.”There are signs of misgiving among financial services providers too. A survey of 500 senior financeprofessionals from the Isle of Man, Jersey and Guernsey, conducted by IoM-based firm Acuity lastyear, showed that more than 50 per cent of those polled believed that the directive was “bad news”,although some 30 per cent felt that the planned withholding tax would not have a negative impact onthe jurisdictions.The results of this survey suggest that the industry is uncomfortable with the information exchangeaspect of the legislation, and many believe the effect of measures like the EU directive will merelyresult in capital flowing to jurisdictions where interest reporting is not an issue.“We are concerned that people might start to move their money to other countries where it can retainits mystery and remain hidden from the Inland Revenue,” says Patrick Firth, managing director atButterfield Funds Services in Guernsey.He also believes that the windfall of new revenue that had been expected from the extra tax may notmaterialise as many investors are restructuring their deposits to legally avoid paying anything.A type of investment that is expected to benefit from the directive is the alternative sector: hedgefunds, investments in films, venture capital funds and private equity funds have greater attractionssince they all fall outside the rules.“The Savings Directive is particularly targeting people who keep money in safe investments such asbank accounts rather than those that invest their money in equities,” says David Frood, tax directorat PricewaterhouseCoopers. “The Inland Revenue believes the worst offenders for tax evasion arepeople that hide their money in cash accounts.”All UK investors should be aware that merely depositing or investing funds abroad or in alternativeinvestments does not absolve him or her from paying tax on them.© Copyright The Financial Times Ltd 2005. "FT" and "Financial Times" are trademarks of the FinancialTimes.http://news.ft.com/cms/s/be9eb30e-d42c-11d9-9db0-00000e2511c8.html