Hard on the heels of the proposed reform of financial regulation in the Channel Islands and the Isle of Man we have the German centre left coalition government pledging to push ahead with tax harmonisation. With the expressed intent of creating growth and jobs the German Finance Minister proposes, amongst other things:
– the “shutting down” of tax havens,
– minimum rates of corporation tax across the EU; and
– minimum levels of tax (presumably withholding tax) on savings.
These three key objectives would, it is thought, get the backing of Mario Monti, the EU taxation commissioner, and aim to avoid “harmful tax competition amongst member states”. The strength of desire to push ahead with these changes to complement monetary union should not be underestimated.
Interestingly, as well as the threatened use, by Britain, of its veto on this issue (which requires unanimity) Denmark is reported to be planning its conversion (as a country) into a zero tax regime for international holding companies including the abolition of withholding tax. Holland is currently seen as a prime location for European holding companies if tax minimisation is an objective. Under the proposal all dividends paid by a Danish holding company to an overseas parent would be tax free.
As we have seen before the very sensitive issue of tax harmonisation perhaps even more than EMU) may well expose serious splits in the EU. As stated above there is clear early evidence of this.
One has to question the likely effectiveness of such measures if the objective is to retain funds in the EU. Abolition of “harmful” tax competition in the EU will only lead to export of funds outside the EU. The issue is one (if it is to be addressed) to be addressed by a body such as the OECD.
The impact on tax havens and of course products marketed out of such havens would be significant.
If one removes tax freedom on underlying life or mutual funds then the offshore/onshore debate becomes a much more straightforward one. One thing would be clear and that would be that there would then be less scope for tax deferment within such structures set up within EU “havens” (or “ex havens”).
The “Monti plan” is of course to introduce compulsory withholding tax or declaration to the tax authorities of the investor.
As stated above if these plans were to be implemented if EU investors perceived an advantage in tax deferment there would, subject to all other issues being acceptable, be a high likelihood of the movement of funds to havens outside of the EU. In such circumstances it would be interesting to see the extent to which dependant territories (not full EU members) were affected. Even if they were, as they say, the world is a big place!