EU begins crackdown against 'tax paradises'

By Stephen Castle
Tuesday, March 4, 2008

BRUSSELS: In the shadow of the Lichtenstein scandal and under pressure from Germany, the European Commission will issue new proposals this year that are likely to widen the scope of tax evasion laws.

Jolted by the Lichtenstein tax scandal, European countries on Tuesday took the first steps toward enacting a fresh clamp down on tax havens on their doorstep.

Under pressure from Germany, the European Commission will draw up new proposals this year that are likely to widen the scope of legislation on tax evasion - and close a loophole under which trusts and some other savings escape the same controls as cash.

European Union countries say they lose billions of euros in revenue because of tax evasion, with Germany alone claiming it loses up to €30 billion, or $45 billion, a year.

However the newest initiative seems destined to re-ignite the long-running and bitter EU battle over banking secrecy. On Tuesday, Luxembourg, Belgium and Austria hinted that they would resist any moves to force them to provide information to other tax authorities on the savings of nonresident investors.

EU nations took 14 years to agree on the current law on the taxation of savings, one of the bloc's most tortuous and fractious policy negotiations. Although billions of euros leaked across European frontiers, countries which provide banking secrecy - and whose banking sectors profit from it - refused to compromise the principle.

Any revision of the legislation is likely to be difficult, but the scale of the new scandal in Liechtenstein, with German prosecutors pursuing hundreds of suspected tax dodgers, has given new impetus to efforts to clamp down on tax fraud.

The current law, which came into force in 2005, was due to be reviewed this year and the European Commission said Tuesday that it would accelerate the process.

The law operates in 42 jurisdictions: the 27 EU nations plus Switzerland, Liechtenstein, San Marino, Monaco and Andorra as well as 10 former British and Dutch colonies.

Most countries exchange information on non-resident deposits with the owners' home country. But Luxembourg, Belgium and Austria are allowed to levy a withholding tax themselves, which is then shared with the depositors' home country.

Germany and Britain want Luxembourg, Belgium and Austria to agree to exchange information so that the EU can apply pressure to the non-European jurisdictions to do the same.

Broadly speaking, the tax also is only applied on interest earned on cash deposits, not dividends or the type of trusts that were being used in Liechtenstein.

During a meeting Tuesday, the German finance minister, Peer Steinbrück referred specifically to the "spectacular case of tax fraud" emanating from Liechtenstein, according to one official who attended the closed-door discussion. The scandal has reverberated through Germany and around the world, and prompted the resignation of the Deutsche Post chief executive, Klaus Zumwinkel.

"German tax payers have effectively been made fools of by high earners using the system to avoid paying tax," said Steinbrück, who described evasion as a "social and moral issue," the official added.

The German stance was backed by Britain, Sweden, Denmark, the Netherlands, Finland and Italy, diplomats said.

"Tax paradises in practice become tax parasites," argued Anders Borg, the Swedish finance minister.

Laszlo Kovacs, the European Commissioner responsible for taxation, will produce a verbal report in May and a formal review of the operation of the EU savings tax law in June. He said he expected to produce new proposals in the autumn, which could include extending the provisions of the directive to "bonds, shares, funds and some other instruments."

However the EU is likely to be much more divided about banking secrecy.

Jean-Claude Juncker, Luxembourg's premier and finance minister, made a veiled threat at the Tuesday meeting to stall any potential changes. "I look forward to many years of fascinating, fundamental, discussion," Juncker said, according to the official.

Under pressure from Luxembourg, Belgium and Austria, the European Commission agreed to present its report in June, before drafting proposed changes, rather than presenting the report and the proposals as a package.

Kovacs made his position clear, describing the withholding tax as a "transitional arrangement."

"I am very much in favor of a final arrangement and a uniform arrangement," Kovacs said. In the medium term, "all parties to the savings tax directive will exchange information rather than a withholding tax," he said.

Kovacs also said that he would escalate efforts to persuade other jurisdictions to abide by the terms of the deal, including Hong Kong, Macao and Singapore. EU officials are negotiating with all three on a double-taxation agreement, giving the Europeans some leverage.
Withdrawals were 'peanuts'

Banks in Liechtenstein said Tuesday that they were victims, not perpetrators, of a global tax evasion scandal and the bank at the heart of the turmoil said clients had withdrawn nothing more than "peanuts," Reuters reported in Vaduz.

LGT Group, a bank for rich clients, said the impact of the tax spat had been limited, although it would dent the business in the short term.

Clients had taken out 100 million Swiss francs, or $96.15 million, of funds in the last two weeks of February, the group chief executive, Prince Max von und zu Liechtenstein, said.

"That is less than one tenth of one percent - actually it's peanuts," he said.