EU guidelines call for the international exchange of citizens' bank account data to catch tax evaders. But the painstaking and time-consuming evaluation of foreign interest data seldom pays off for German tax offices.
Austria and Luxembourg are known as two of the lucrative European Union countries for investors looking to shield their wealth tax authorities. Tax loopholes have long been a thorn in the side of EU finance ministers. Common EU interest rate guidelines were intended to close these loopholes eight years ago. The guidelines were intended to establish access to all EU citizens' accounts in all EU countries and ensure transmission of data back to the responsible tax authorities.
There's just one problem. That data has proven extremely cumbersome to deal with.
"The things trickle in on paper," said Thomas Eigenthaler, head of the German Taxpayers Union. Processing the papers makes it difficult and time consuming for tax offices to line up foreign accounts with the right people and evaluate data from foreign countries.
"We have to assume that we have very different tax administrations in Europe and that each country has its own software," Eigenthaler said.
A race against time
The Federal Central Tax Office, a part of the German Ministry of Finance, collects the information sent from abroad and shares it with state authorities. "It is a time consuming task, and it's often the case that there are hardly any tax consequences because the amounts of money are so small," Eigenthaler said. Around just half of one percent of a tax office's citizens are involved in such a procedure.
The automatic and electronic transfer of data would give tax authorities more time. Reports from 2010 and 2011 are currently under analysis, and the delayed receipt of information from abroad means every tax return a citizen filed in that period needs to be re-evaluated despite the return being long finished.
"We are trying to catch up with this process' past years as quickly as possible," said Luise Hölscher, the deputy finance minister for the state of Hesse. "We are running up against the statute of limitations for this information. That's because a new process was established in 2005, and there is still no common procedure for it."
Much work, low returns
The amount of labor that goes into processing data from abroad is not commensurate with the minimal extra income tax offices receive, Hölscher added. If income from foreign interest has already been taxed then German tax authorities get information about the account. However, those details are already listed on a person's tax filings, and German officials cannot re-tax the money there.
The western German state of Hesse offers an illustration for those saying the existing procedure does not pay off: during its first four years, from 2005 to 2008, the state earned a total of 1 million euros ($1.32 million). But doing so required evaluating thousands of reports regarding the state's taxpayers, all on the taxpayers' dime.
No one knows how much money is in Luxembourg and Austria - or how much has been taxed, Hölscher said
For Thomas Eigenthaler, the EU interest guidelines do not go far enough. He believes they need to cover more investments than only savings accounts, citing the fact that the financial world has changed such that it has become easier than ever to create new financial products.
Of the EU's 28 members, only Austria and Luxembourg have not signed on to the common guidelines. The two nations represent the largest holders of investments in the bloc and, EU finance ministers believe, the largest amounts of untaxed wealth. Exactly how much foreign capital has been invested in Austria or Luxembourg is unknown. Ministers have also said they would like to see Switzerland and Liechtenstein, which are not EU members, agree to the guidelines, which would place even more pressure on tax offices to evaluate more reports.