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Exchange for the better

Last week, I brought readers up to date on the long-running issue of withholding tax or exchange of information being considered by EU member states.

Thankfully – for the UK, that is – it seems a system founded on full disclosure of information has been settled on, with exceptions made for some states including Luxemburg, Belgium and Austria, which retain an interim right to withhold tax.

Luxemburg proposed that certain types of investment fund should be excluded from the provisions and this has apparently been accepted. It is understood that a revised draft directive incorporating the proposals and transitional exclusions is now being prepared.

Given the strength of the Eurobond market in London, the UK had always opposed withholding tax. As clear evidence of this, draft regulations were published last November setting out improved information reporting procedures in respect of savings income.

From April 2001, the Inland Revenue can require banks and other savings institutions paying interest to report the amounts paid to non-resident individuals as well as to residents. Interest payments covered include interest paid on bonds and gilts, interest distributions made by bond funds, foreign dividends and redemption proceeds of discounted securities.

The new arrangements for information exchange mean current rules on withholding tax for financial institutions acting as paying and collecting agents are abolished.

Payments made to companies, including mutual funds and life companies, will be excluded from these provisions unless the payers of interest to such persons are already subject to reporting provisions.

For 2001/02, the UK authorities will only receive details of payments of interest made to individuals resident in EU states, the Isle of Man, Channel Islands, any other UK overseas territory and any other country with which the UK has reached agreement on information exchange.

Provisions are included that could impact on nominee arrangements. If an individual who is beneficially entitled to interest needs to disclose his identity to the payer to receive gross interest, this information will form part of what will be included as part of the reporting arrangements.

Once in receipt of this information, the UK authorities will be in a position to fulfil their duties under the forthcoming EU directive on disclosure of information including, in some cases, the true identity of the beneficial owner of interest.

There is a growing importance attached to information sharing in the EU. In the UK, a resident is liable for UK tax on worldwide income arising, with only non-UK domiciliaries being assessed on the remittance basis. Of course, the UK has many double-tax agreements with other countries and there is also unilateral relief but – subject to the rules for non-UK domiciliaries – the rules on liability to UK tax remain.

Many EU citizens invest outside their country of residence so greater information on the non-resident interest produced will doubtless be of value to help combat non-declaration and evasion.

It is worth noting that neither the proposed EU directive nor the UK provisions will apply to dividends from, say, collective investments or to any aspect of investments in insurance policies.

For the UK-resident investor, gross interest can still be received from abroad although not, it seems, from states with transitional relief from the disclosure rules. The rules on the taxation of gains and income under offshore funds and chargeable event gains under offshore policies will also remain the same. So, for the vast majority of UK-resident investors, the factors impacting on the assessment of the attraction or otherwise of offshore investments remain unchanged. Remember, these provisions aim to stamp out evasion, not legitimate tax deferment.

It is worth the time of any adviser to non-UK but EU-resident individuals and UK residents investing in the EU to keep in mind these emerging rules. The impact of EU legislation, even if tax harmonisation looks to be off the current agenda, continues to be felt in such directly relevant areas as the investments underlying collective investments, pension funds and the marketing and regulation of pan-European financial services.

It is impossible to ignore legislation and practice emerging from the EU, which serves to increase further the knowledge requirements for any forward-looking adviser operating in any EU jurisdiction.

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