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A ding-dong for Europe

For students of the European Union and its impact on financial services, there is much to keep them amused.

One particular issue that we have been tracking is the EU savings directive. This is due to take effect from January 1, 2005 and will apply to all EU member states, certain dependent and associated territories of member states, including the Isle of Man and the Channel Islands, and adhering third countries such as Switzerland.

As a reminder, the broad objective of this directive is to ensure that information on deposits made with banks resident in EU member states by other than residents of those states is communicated to the tax authorities of the countries in which those non-resident depositors are resident.

For those countries that for various reasons cannot or will not share this information, there will be compulsory deduction of tax at source. Jurisdictions with a financial system in which banking secrecy is pre-eminent are the clear adherents to this alternative method.

However, there are signs of misgivings. Switzerland is reported to have been using delaying tactics over implementing the directive to win concessions from the EU for preserving its banking secrecy.

It has been reported that the directive has suffered a further setback as Luxemburg&#39s prime minister has said that his government will not accept any deal that treats EU countries and third countries (non-EU countries such as Switzerland) differently.

Luxemburg is Switzerland&#39s traditional banking rival in Europe and it may be worried about becoming competitively disadvantaged. Its concern is clearly that if rules become harsher between EU countries, the deposited cash will just flow out to non-EU jurisdictions that are perceived as being softer.

Like all EU countries, Luxemburg can veto the directive. Unless the directive is agreed by June 30, 2004, an entirely new round of negotiations may have to take place with all the attendant delays.

It has been reported that Switzerland&#39s chief negotiator said: “We have offered full co-operation for the taxation of savings and revenue sharing. We are also ready to co-operate fully in indirect taxation and the fight against fraud. And we are ready to take on the full Schengen [free movement system]. However, what we need is a specific clause for the purely hypothetical case of a development that would … endanger banking secrecy.”

As a reminder of the areas covered by the directive, it is worth noting that in the words of a European Commission press release: “The directive has a broad scope, covering interest from debt claims of every kind, including cash deposits and corporate and government bonds and other similar negotiable debt securities. The definition of interest extends to cases of accrued and capitalised interest. This includes, for example, interest that is calculated to have accrued by the date of the sale or redemption of a bond of a type where normally interest is only paid on maturity together with the principal (a so-called zero-coupon bond).

“The definition also includes interest income obtained as a result of indirect investment via collective investment undertakings (investment funds managed by a specialist fund manager who places the investments made by individuals in a diverse range of assets according to defined risk criteria).”

All involved in giving advice to or developing products for overseas investors or UK investors investing overseas should keep a close eye on developments on this directive. While the directive applies primarily to deposits, it is not confined solely to deposits.

Every advised UK investor ought to be aware that merely depositing or investing funds abroad does not absolve him or her from paying tax on them. Interest from offshore deposits is, as I have said before, taxable on an arising basis for the UK resident, regardless of whether it is brought into the UK. The remittance rules do, however, continue to be of use to non-domiciliaries.

Based on the above press release extract, it would seem that an insurance policy or capital redemption plan would fall outside the range of the directive. This view would seem to be corroborated by the Reporting of Savings Income Information Regulations 2003 laid before Parliament on December 17, 2003.

If this is the case, one may question whether this would remain so in the long term. Even if it does, avoiding the directive should not, of course, be the sole or main determinant when choosing an outer plan wrapper. Advice is most definitely necessary.


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Guide: how to… communicate with your pension members

Effective communication of your pension scheme is a large part of getting auto-enrolment right. Delivering the same message to all employees is not necessarily the way to go. To assist you with the communication of your pension scheme, we have provided some key areas to think about, such as:

  • What to consider when segmenting your workforce
  • How to communicate to pension scheme members at the right time in their member lifecycle
  • What topics you should be discussing with your pension members
  • The new pension freedoms and the importance of communicating them


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