Armageddon

The EU Savings Tax Directive. I am out of the international financial services business now. I sold the company management part of my law practice in 1998. So, I am really out of touch. But, a recent gloating post by a ‘tax em or hang em’ guru about the coming Armageddon for Anguilla and other BOT financial services centres got under my skin. When that happens, I am compelled by a personal character weakness that I have previously admitted to to say something.

If you want to live in a jurisdiction where you are molly coddled from the cradle to the grave, live in the UK or another European jurisdiction. And, pay the high taxes that go with the safety nets. If you enjoy the freedom of living in one of our frontier societies, such as Anguilla is, are willing to put up with the lack of social services, but bank your total pay package at the end of the month with no deductions, then you live in an offshore financial jurisdiction, such as Anguilla is. You probably make your living providing corporate and other structures for international financial planners who service clients with international business who are taxed in high-tax jurisdictions. In Anguilla, we lead a tax-free life, in a hurricane-prone environment. We do have 5% deducted from our Anguillian salaries for social security payments, but the benefits are so ludicrously small as to be insignificant.

So, back in 1999 when the Europeans dreamed up the EU Savings Taxation Directive, we were not too concerned. Its main purpose was to allow the tax authorities in EU Member States and associated territories to share information about interest payments made to individuals. This was to help ensure savers and investors paid the right amount of tax on their savings income and to counter cross-border tax evasion within the EU. It only applied to individuals, not to trusts and other ‘offshore structures’.

The Directive set up two systems. One was an “information exchange” regime, whereby all participating countries agreed to report interest on savings paid to citizens of other EU Member States to those States’ tax authorities. The other was a “withholding tax” regime, whereby the identity of the recipient of interest is not reported, but a small tax (15%) is paid in the offshore centre and the balance remitted to the EU Members State in a lump sum so that the tax authorities are not informed of the individuals who paid. Countries with a tradition of banking secrecy, eg, Austria, Luxembourg, Belgium, and Switzerland, chose the withholding system. So did the Netherlands Antilles and the BVI. Anguilla and the Cayman Islands opted for the exchange of information regime.

Over the years, negotiations between the offshore tax jurisdictions resulted in an agreeable compromise whereby only interest income earned from certain savings and bonds came within the scope of the Directive. Most income remained safely sheltered so long as you used a jurisdiction like Anguilla. As Charles Hermann of KPMG in Switzerland explains, the Directive was so full of holes that investors simply readjusted their holdings to continue to legally avoid taxation. Furthermore, the Directive had the opposite of the desired effect of bringing investors’ money ‘back home’. Some of the most fearful investors simply placed their money far offshore in safe jurisdictions such as Singapore and Hong Kong.

Now, on 13 November 2008, the EU dropped a bombshell. They have amended the Savings Tax Directive. The intention is to close existing loopholes and better prevent tax evasion. The previous Directive only applied to payments to individuals. Anybody who transferred the money they held on deposit into either a company or a trust immediately avoided the disclosure or tax obligation. Some Swiss banks were bulk buying up to 10,000 BVI and Panamanian companies at a time. Interest payments which are channeled through previously tax-exempted structures will now be caught in the net. Companies, IBCs, corporations, limited liability partnerships, foundations, trusts and the like will all come within the scope of the Directive. Innovative financial products, even life insurance, will not escape.

The impact on West Indian offshore centres, including Anguilla, may well be radical. Local banks will be obliged to look through the company, foundation or trust that is recorded as the legal owner of the account to which the interest is paid and treat the interest as having been paid to the beneficial owner of the organization. They will be obliged to use the information held on their files for anti-money-laundering purposes to identify the real human person who benefits from the structures created in the tax haven location. The ‘reform’ is no doubt intended to kill a substantial part of Anguilla’s international banking business.

The other side of the coin is that the high-tax countries who have created this bomb-shell will not gain one penny extra in tax revenue. What is more likely to happen is that, if they implement the Amended Directive as indicated, the investments presently held in Anguilla and the BVI will soon be heading to Hong Kong and Singapore. Talk about shooting yourself in the foot!