Were there any practical difficulties with the implementation of the EU Savings Tax Directive in July? What has been the impact of the directive on bank deposits? Has there been a particular impact on deposits from UK-based customers?McLeod: I think the impact on bank deposits has been minimal. There have been a number of scare stories but, in my opinion, the impact of anti-money-laundering rules, “know your client” procedures, crime reporting and other anti-crime measures has been that international criminals (and I include tax evaders within that category) have kept money well away from European financial centres. The impact of the savings tax directive will be relatively limited. There will be a flight of some “hot” money to the Far East but the overall impact will, in my view, be negligible. Couch: At this stage, Isle of Man bank deposit statistics for quarter three 2005 are still being collated but early indications show the number of bank deposits has risen in the last quarter, implying no negative impact from the directive. One of the main reasons for this is the Isle of Man is still considered a secure and attractive place for investors. The Island has comprehensive arrange-ments for depositor, investor and policyholder protection that extend to non-resident investors and embrace sterling and foreign currency assets. This is in addition to its AAA credit rating, competitive interest rates and a wide range of attractive financial products. Austin: While it is still early days, the first signs are that the impact may not be as significant as some had originally predicted. There has been no significant outflow of deposit business reported to date. In fact, in the run-up to its introduction, when one might have anticipated a flow of deposit business away from the jurisdiction, the official statistics for the period March-June 2005 showed a 10 per cent increase in deposit business to 173bn. It should also be noted that continental Europe has never been a key geographic market for the industry’s private client sector and for a number of years, the Island’s banking sector has been following a strategic direction which has focused increasingly on the international expatriate market and become far less UK-centric than in the past. Historically, a few of the major international banks will have a proportionally higher number of UK cust-omers but they have not reported a substantial movement of deposits either. Have more people chosen the exchange of infor-mation option than you expected? Why do think they chose this option? McLeod: The basic principle behind the Savings Tax Directive is the provision of information on cross-border payments of “savings income” (basically interest). However, for a transitional period, an alternative option, the imposition of a withholding tax, will be available should a country or territory so decide. Where the withholding tax option is used, affected individuals will be able to avoid it if they agree to a disclosure of information to their country of residence or if they get a certificate of exemption from a competent authority in their country of residence. Those with nothing to hide, that is, the vast majority, will opt for disclosure. There are no statistics available, and I do not expect any detail on this aspect of the scheme to be published for many years, if at all. Revenue & Customs does not see the production of statistics as a priority. Couch: All investors subject to the directive with funds invested in the Isle of Man can choose an exchange of information or a retention tax option. Our financial institutions specialise in different business sectors and so have varying custo-mer portfolios which will impact on their choice of information exchange or tax retention. It is up to our cust-omers to decide what is best for their individual needs but by providing them with the option of a retention tax, we have allowed them greater flexibility. Austin: We have no specific figures on this at this stage but, anecdotally, from talking to our colleagues in the Jersey banking sector, it would appear a reasonable proportion of customers have opted for exchange of information. However, we believe it is still early days in this whole process. Has the fact that Gibraltar has yet to sign a bilateral agreement with the UK had any impact on bank deposits? McLeod: To me, this seems to be a storm in a teacup. I expect these local difficulties to be resolved relatively quickly and Gibraltar to come within the full scope of the Savings Tax Directive. There have also been some differences in interpretation as between various signatories to the directive. These differences are only to be expected in the early years. I expect these differences to be worked out over time. The rules implementing the Savings Tax Directive are still evol-ving. It is probably fair to say there is confusion as to the precise details of the scheme. Couch: From an EU perspective, Gibraltar is a region of the UK. Although Gibraltar agreed to apply the directive in respect of the other 24 member states, it was not obliged to do so with the UK. This led to the situation that UK residents could lodge funds ‘invisibly’ in Gibraltar but not in the Isle of Man. The Isle of Man government, along with other offshore centres, protested to the UK Government, which in part led to the joint statement by Gibraltar and the UK that the “gap” would be closed. As a consequence, we are not aware of any real impact caused by deposits moving to Gibraltar. Austin: There was rightly some concern when it was first highlighted that Gibraltar had not finalised its bilateral agreement with the UK. Jersey and the other crown dependencies argued all along that they were willing to implement the same measures as contained in the directive on the understanding that there would be a level playing field. The Gibraltar issue therefore raised an important point of principle. However, from a practical perspective, we are not aware that Gibraltar’s failure to sign up to a bilateral agreement with the UK has had any impact on deposits in Jersey and we do not anticipate that it will do so, since we have commit-ments from both the UK Government and Gibraltar that they will sign a bilateral agreement by the end of the year. Could there be more impact on bank deposits next April when people receive their withholding tax bills? McLeod: No. People will not receive bills for withholding tax. As the name implies, withholding tax is a tax withheld from interest payments – there is no physical payment of tax by the UK resident account owner in April. He/she will pay tax (if any is due) on foreign income as part of the self-assessment procedure. The liability will be settled on January 31 each year. Couch: All investors of Isle of Man financial institutions were contacted and shown the options available, prior to the implementation of the directive on July 1, 2005. But some investors may still want to move their account once they have seen the impact of the retention tax on their bank deposit, this is some-thing we are unable to predict at this stage. Austin: It is inevitable some customers will have failed to act when they were originally contacted by their financial institution and, as a result, the first time that they notice that a retention tax has been imposed may be when they receive their bank statement in April next year. However, the client contact prog-ramme by the vast majority of banks has been first class and I doubt if many cust-omers failed to respond at all. What can UK-based customers do if they have taken no action so far on their offshore bank accounts? McLeod: Most UK customers need do nothing. The bank (or other institution) will have contacted them to arrange disclosure and will have advised them on the procedure to get a certificate of exemption. The rationale behind EUSTD is to combat tax evasion by residents of EU countries who invest outside their country of residence. Couch: The first thing we would advise them to do is check their correspondence from their banks. They will have received information on the directive and on their options direct from their provider. If they have misplaced or disposed of this information, their bank will be able to help them, either by phone or correspondence. It is likely that a number of banks will have applied the retention tax option as the default if they have not heard directly from the customer. If the customer actually wants to opt for exchange of information, they need to make sure the bank is aware of their choice. Austin: Customers who have not contacted their bank are subject to the so called ‘default’ position, which is the imposition of the retention tax. So the first step for customers who do not want to pay the tax now that the Directive has been implemented, will be to contact their Bank. Do you think the EU will expand the remit for the directive, such as to cover corporate vehicles? McLeod: The withholding tax option is expected to be reviewed in 2010. There is little need for the directive to be applied to companies. The existence of a company and a company’s income is a matter of public record – the information required by Revenue authorities is already out there. I do not think the scope of the directive will be expanded in the short or medium term. Couch: The directive has taken a long time to agree and was always controversial, even within the EU. Therefore, we expect the EU will wait for a period of time to assess the effectiveness before deciding on any amendments. At present, it is felt that the directive will be viewed as a success. Austin: There is a view that the EU will want to re-examine the scope of the directive in the longer term. But although we are keeping close to developments, it should be noted that Jersey remains outside the EU itself and therefore any expansion of the directive would have to be the subject of further negotiation between our Government, the UK and the EU authorities. If there is any expansion of the remit, it will be necessary to embrace the third countries and territories such as Switzer-land and Andorra and the key driver for us will once again be the level playing field principle. I know also the EU wish to engage in discussions with juris-dictions outside the scope of the directive and we would welcome such moves.