EU Clamps Down on Tax Evasion

Tax dodgers who take advantage of different tax regimes across the EU and banking secrecy in countries like Switzerland are in for a rude awakening.

EU finance ministers on Tuesday in a marathon round of talks, agreed on tough new measures that will effectively make cross-border tax evasion within the EU an impossible feat in the future.

The nuts and bolts

Under the agreement, 12 EU member states and their overseas territories will exchange information about non-residents' savings starting in 2004, thus eliminating most banking secrecy practices.

It also applies to offshore territories such as the Channel Islands and the United Kingdom’s Caribbean dependencies, whose banks and financial institutions are believed to manage a large amount of EU citizens' savings.

The new deal also calls on the tax havens of Luxembourg, Austria and Belgium to levy a withholding tax starting at 15 percent on interest earned on foreign investors' savings beginning in 2004. The withholding tax would then be raised to 20 percent in 2007 and to 35 percent by 2010.

EU Internal Markets Commissioner Frits Bolkenstein said the agreement would ensure that every EU citizen paid an equitable tax on income invested abroad.

The EU had decided on a common procedure against tax evaders in early 2000 and planned to put it into action by the end of 2002. But EU finance ministers failed to achieve the necessary breakthrough at a special meeting last December.

Banking secrecy remains sticking point

The ministers first reached a deal after the inclusion of provisions to allow Luxembourg, Austria and Belgium to retain their banking secrecy laws until Switzerland sheds its own and complies with international banking disclosure standards.

Switzerland, a non-EU country with banking secrecy laws dating back to the 1930s that have made it a popular financial center, has long been a thorn in the side of the EU in its battle against tax evasion. The EU has often applied pressure on the small Alpine nation to amend its laws and help in the battle against tax evasion.

In the latest deal, Switzerland has refused to compromise its banking secrecy laws and is instead offering to levy a 35 percent withholding tax on interest income and to pay the money to the EU without revealing the identity of the depositor.

Following the Swiss model, Austria, Luxembourg and Belgium would also impose the withholding tax regulations and share the proceeds with tax authorities in EU states without disclosing the depositor's identity.

Swiss authorities and bankers have cautiously welcomed the EU decision.

"We welcome the fact that the EU appears to have returned to the so-called co-existence model allowing countries to choose between exchanging information and imposing a withholding tax," Swiss Bankers Association spokesman, James Nason told the Associated Press. "The EU cannot demand of Switzerland more than Luxembourg, Austria and Belgium are offering to deliver," he said.

Eichel: "Good news for all honest taxpayers"

Despite technical problems with Switzerland, the latest compromise has been hailed as a success in the battle against tax evasion.

German Finance Minister Hans Eichel said he was satisfied with the agreement. With the deal, he said, the EU would finally end tax evasion in Europe and "the idea that one could live with others with tax evasion." Eichel said the deal was "good news for all honest tax payers."

EU deal to strengthen Germany's hand at home

Germany, which recently introduced proposals to levy a withholding tax of 25 percent on the foreign savings of its residents, was eager to push through the EU deal to strengthen its own domestic proposals. The German Finance Ministry estimates that German citizens have savings of up to €100 billion ($107 billion) abroad.

Eichel said that the German government’s planned withholding tax of 25 percent would not hinder EU plans.

The finance minister said that a lower tax rate would automatically apply as long as a citizen legally declared his assets. In other words a German citizen who invests his money in Switzerland after 2010 and needs to pay 35 percent taxes there, could get back the difference of 10 percent on taxes in Germany from the tax office.

EU finance ministers are expected to take a formal decision in March this year. Afterwards, the EU would have to negotiate separate deals with Switzerland, Andorra, Monaco, Liechtenstein, San Marino and the United States.