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Open secrets

There have been a number of recent developments on matters that are not

directly relevant to UK IFAs but which are an indication of the increasing

importance of European tax issues to financial planning.

A new breakthrough has occurred in the long-running dispute on how to deal

with non-resident savings, that is, savings or investments in an EU country

made by a resident of another EU country.

One camp has pushed for the introduction of a withholding tax (proposed at

20 per cent) while the other has favoured an exchange of information. But

what has now been proposed by Portugal has the hallmark of a classic

compromise. Only Austria and Luxemburg opposed the com-promise initially,

with Austria still remaining opposed.

It is likely that for five years from implementation, planned for the end

of 2002, EU countries would have the option to withhold tax or provide

information. After this period, all 15 EU countries would move to

information exchange as the only system. This would mean that countries

with banking secrecy rules would have to drop them.

The compromise depends on the European Commission being able to negotiate

similar agreements with non-EU financial centres such as Liechtenstein,

Switzerland and the US by the end of 2002.

Also, the UK would have to deliver agreements with the Channel Islands,

Isle of Man and associated territories including Bermuda, British Virgin

Islands and the Cayman Islands. This is a far cry from the situation a few

months ago when the UK was the only country opposing a withholding tax,

which the Chancellor of the Exchequer feared would drive the £1,800bn

international bond business out of London to non-EU financial centres.

Any countries joining the EU would have to adopt the compromise.

It is well known that the UK Government is reported to be much more in

favour of information exchange than withholding tax. Maybe some of the

jurisdictions which pride themselves on their confidentiality might not be

so happy.

Anyway, it is worth noting that the principle of unanimity holds good in

respect of taxation changes so nothing can be taken for granted in this

most difficult of areas.

The trend to information sharing would be entirely in line with the trend

towards greater co-operation on key issues across Europe.

Those seeking to avoid tax through foreign deposits and non-declaration

should be warned. Well, at least in Europe. Those more determined souls

will have to look outside the EU for tax-free homes for their funds. This,

of course, is the main danger of provisions such as those proposed – they

do the job in the jurisdiction affected but the hot funds merely move


Perhaps with this in mind, at the end of last month, the Organisation for

Economic Co-operation and Development was due to publish a list of offshore

financial centres offering harmful competition as part of its global

crackdown on tax evasion.

Six centres – Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius and

San Marino – have already pledged to adopt international standards on

transparency in an attempt to avoid punitive measures by the bigger


Added to this is an OECD report into banking secrecy which is intended to

improve international co-operation on the exchange of information in the

possession of banks and other financial institutions. It observes that

secrecy is a fundamental requirement of banking systems but also that such

secrecy towards tax authorities could mean lost revenue.

The report also recognises that there is growth in cross-border financial

transactions due to globalisation, the technology revolution and

liberalisation of financial markets. This is challenging for tax

authorities around the world.

Next week, I will summarise the report&#39s findings and analyse the

opportunities for contacting new and existing clients that these

developments offer to IFAs.


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