The Week in Europe
By David Jessop
On January 21st after an incredible 13 years of negotiations, European Union (EU) member states reached agreement on a complex internal measure that at first sight may seem to have little if anything to do with the Caribbean. The issue, which was finally resolved over what must also be an all time record - a seven hour lunch - involved Ministers from all 15 member states agreeing a deal on the taxation of interest on savings, know as savings tax or a withholding tax.
The background and history of this measure and the matters of principle it raises for the Caribbean needs a little telling.
Some time ago the European Commission (EC) was asked to present proposals on the ways in which the different European tax regimes might be harmonised. The idea was that this would result in an increase in national tax revenues as many savers deposit sums outside of their home territory where they earn interest on their savings but do not declare these for tax purposes in their country of residence.
As a result the EC prepared a number of initiatives. One of these was aimed at establishing a minimum level of tax on the interest paid on savings by nationals of one nation that are held in another nation. The EU also agreed that its ultimate objective would be the exchange of tax information on as wide a basis as possible.
At the same time the EU agreed that the adoption of the directive was conditional on equivalent measures being agreed by a number of countries outside the European Union to prevent capital flight towards tax havens or other nations where savings taxation might be less strict.
This reflected parallel discussions led by the world’s wealthiest nations, the 30 members of the Organisation for Economic Co-operation and Development (OECD). Under its Harmful Tax Competition Initiative the OECD - which includes the EU - had pressurised over 40 independent nations, including many in the Caribbean, threatening sanctions unless they made a commitment to exchange information with OECD countries on tax matters. Consequently, these jurisdictions agreed in February 2002 to work with the OECD in its Global Tax Forum to implement new standards including the automatic exchange of information.
At the same time under a timetable agreed in Europe, the UK and the Netherlands were to make similar arrangements for their associated or dependent territories, including the UK Overseas Territories in the Caribbean (Anguilla, the British Virgin Islands, Turks and Caicos, Montserrat and Cayman) and the Netherlands Antilles.
In other words whether Caribbean nations and overseas territories liked it or not, the general movement was towards agreeing a single set of international rules on the taxation of savings. The OECD suggested that they had little option but to be embraced by a single global approach to the issue. The result was that most agreed that there would be one set of rules for all and that they would begin to change their tax regulations and legislation on the disclosure of information.
However, the decision of the EU Council on January 21st to vary the arrangements for some European nations suggests that there will be one rule for wealthy countries and quite another for developing nations.
In the case of Austria, Belgium and Luxembourg, the EU agreed that they would only be required to exchange information when a number of other nations including Switzerland and the US agree to do the same under OECD rules. These three EU nations will apply a withholding tax on savings held by residents of other member states increasing from 15% from 1st January 2004 to an eventual 35% from 1st January 2010. The EU agreement further stated that this will only then apply when and if the US also committed itself to the exchange of information, a circumstance considered unlikely in the face of intense lobbying and congressional hostility.
Just as importantly for the Caribbean, Europe also decided to vary the rules as far as Switzerland is concerned. Unlike the other three states, Switzerland is not an EU member but is a member of the OECD.
For the Caribbean the willingness of the EU to vary arrangements that the Organisation for Economic Co-operation and Development (OECD) has been seeking to impose on them under the OECD’s Harmful Tax Competition Initiative is at the very least curious. The OECD has spent months arguing that the Caribbean and other nations must meet international norms, that there should be equitable international arrangements, that it was essential they shared information on the accounts of non-nationals and that these were also matters related to international security.
Antigua’s Chief Negotiator on International Financial Services, Sir Ronald Sanders, for one has informed the Secretary General of OECD that his country believes that this decision by the EU to vary the rules, requires an urgent meeting of the OECD Global Tax Forum so that “all jurisdictions could collectively decide whether there is any basis for further commitment to the OECD’s initiative to eliminate tax competition”. “It is”, he noted, “now patently and blatantly obvious that no level playing field exists and jurisdictions such (as Antigua) are being placed at a severe disadvantage”.
Britain’s Overseas Territories in the Caribbean also find themselves in something of a quandary. Most are far from happy with the approach that London has taken and like Europe’s member states are wishing to consider with London the possibility of varying the EU decision.
None us like taxation but if well considered and implemented it is the life-blood of all states. For these reasons any withholding tax that protects nations against tax evasion and criminality is helpful. States have to function. Social services, public health and security have to be provided. However, the EU decision suggests that in taxation, as with much else there is continues to be one rule for rich nations and another for those that are still developing.
David Jessop is the Director of the Caribbean Council and can be contacted at [log in to unmask]
January 31st, 2003
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