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The amount of financial information to be shared between EU countries will significantly increase over the next years. As part of its intensified fight against tax evasion, the European Commission has proposed extending the automatic exchange of information between EU tax administrations, so that the EU will have the most comprehensive system in the world.

There are already plans to extend the EU’s Savings Tax Directive, and on 12th June 2013 the Commission announced its plans to include dividends, capital gains and other forms of financial income and account balances to the list of categories to be subject to automatic exchange of information.

The Commissioner for Taxation, Algirdas Šemeta, Commissioner for Taxation, explained:

“Member States will be better equipped to assess and collect the taxes they are due, while the EU will be well positioned to push for higher standards of tax governance globally. It will be another powerful weapon in our arsenal to lead a strong attack against tax evasion.”

Tax planning can get very complex when you have financial assets in different territories, and you now need to be extra careful that you get it right. Speak to Blevins Franks who are experts at Spanish, French, Portuguese, Cyprus, Malta and UK tax issues to establish the most tax efficient ways of holding your assets.

The EU has two Directives which provide for automatic information sharing, both of which will be extended.

Savings Tax Directive

The Savings Tax Directive came into effect in 2005. It ensures that Member States collect data on the savings income of EU residents and automatically forward it to the tax authority of the Individual’s country of residence.

“Savings income” covers interest from cash deposits and debt claims of every kind, such as corporate and government bonds.
So far it does not cover interest from investment funds, pensions, innovative financial instruments and payments made through trusts and foundations.

In May the European Council committed to adopting a revised Savings Tax Directive by the end of this year. It will close the loopholes, so that the above income will also be exchanged on an automatic basis within the EU.

Austria and Luxembourg currently do not automatically exchange information and therefore, if you do not opt for exchange of information, these countries will instead deduct a withholding tax. However they have now committed to fall into line with the rest of the EU despite previous reluctance. The EU has started discussions with Switzerland, Andorra, Liechtenstein, Monaco and San Marino on automatic exchange of bank data. Although signatories to the Directive, they currently apply the withholding tax so that banking secrecy can be maintained.

Administrative Cooperation Directive

The Administrative Cooperation Directive will apply automatic exchange of information to other forms of income, with effect from January 2015.

Until now it covered income from employment, director’s fees, life insurance, pensions and property. All “available” information is to be reported.

Under the latest proposal, the list will include dividends, capital gains and other financial income and account balances.
This will also apply from January 2015. In these cases, exchange of information will be mandatory as Member States will already be making it available to the US under its Foreign Account Tax Compliance Act (FATCA).

The European Commission actually claims that its new requirements go further than FATCA.

It plans to introduce a bill to make exchange of information more efficient and less fragmented.

In April the G5 countries of the UK, Spain, France, Germany and Italy agreed to develop and pilot an automatic exchange of information system, along the same lines as FATCA. According to the Commission, 12 other Member States have indicated they will sign up.

“Perfect storm” of events

A year ago, Mr Šemeta observed that his plans for tax transparency faced a “wall of apathy”. This has radically changed. In an interview with EU Observer at the beginning of June he said that the change in EU politics was the result of a “perfect storm” of events.

These include the ongoing economic crisis, the US push to end banking secrecy with its FATCA bill, and the scandal in France where the budget minister Jerome Cahuzac admitted to hiding €600,000 in Switzerland.

However Šemeta believes the main trigger was “Offshore Leaks”.

Last year, an Australian reporter obtained a hard drive containing 260 gigabytes of information on secret accounts around the world.

Since then, the International Consortium of Investigative Journalists (ICIJ) has co-ordinated work on the data by over 100 reporters from media houses such as the BBC, The Guardian, Le Monde, El Confidencial and Washington Post, who have been reporting on their finds.

Mr Šemeta says this has made the issue more visible and forced political leaders to realise the amplitude of the problem. Citizens have also begun paying more attention to how their governments collect due taxes.

More recently, on 14th June, the ICIJ launched an interactive database to help “crack open the historically impenetrable world of offshore tax havens”. It allows the public to search through over 100,000 secret companies, trusts and funds created in offshore centers like the British Virgin Islands, Cayman Islands and Singapore.

The European Commission believes that automatic exchange of information must become the global standard and the EU will do everything it can to ensure this. As Mr Šemeta told EU Observer, tax transparency is more important than data privacy.
This is the way the world is going. Financial privacy is fast being consigned to history. You need to expect your tax authority to know where your wealth is and what income and gains it generates. There are no hiding places.

However this does not mean that tax mitigation is no longer possible. There are legitimate, approved arrangements available in Spain, France, Portugal, Cyprus and Malta which can lower taxes on your savings and investments, sometimes on your wealth and estate too.