Sputnikcccp / Wikimedia*

The European presidency has just issued a note advocating a push to increase financial transparency in Europe through its Savings Tax Directive. As they say:

“The Presidency attaches crucial importance to gear up bilateral talks in order to reach political agreement upon the adoption of the Savings Tax Directive in the very near future.”

Unsurprisingly, there are some rather large flies in this ointment. Austria and Luxembourg have long been holdouts on the European Savings Tax Directive, working hard behind the scenes to spike progress on transparency. Instead of agreeing to automatic exchange of information for tax purposes, they offer only an anonymous withholding tax. This arrangement, as we have just argued, goes against the spirit of just payment of due taxes by European taxpayers, and against a drive towards cooperation amongst member states in acting not to deprive fellow EU members of revenue. Furthermore, the relevance of the European Savings Tax Directive goes beyond Europe: it could become the nucleus of a multilateral agreement on automatic tax information exchange.

The current legal situation in the European Union is that this transitory arrangement for these two countries would end once the European Union signs treaties with a few (nearby but non-EU) secrecy jurisdictions for information exchange upon request (Article 10, Council Directive 2003/48/EC). The largest of these is Switzerland, others are Andorra, Liechtenstein, Monaco and San Marino. Remember, we’re talking agreement by each of those non-EU jurisdictions with the full European Union.

The prospects for such agreements have increased since the G20 stated its intention to fight against banking secrecy, and Switzerland and a few others have been forced to remove their ultra-tight interpretations of OECD norms. But progress on negotiations with these few non-EU countries is being blocked within the European Council by Austria and Luxembourg. The reason, of course, is that if EU negotiations with Switzerland were to be successfully concluded (the other minnows would be expected to fall in line, if Switzerland did), their ability to preserve banking secrecy for EU countries would come to an end.

What can the Swiss do in order to prevent the unthinkable: an end to secrecy? They remember the Roman Empire’s strategy of divide et impera (divide and rule; see TJN Germany blog). Dividing Europe’s key members on the issue of tax transparency would help them to prevent the dreaded automatic information exchange from reaching its borders.

So Switzerland has offered money instead of transparency to certain powerful EU members through an anonymous final withholding tax – see our previous blog commentary on Swiss-UK-German tax deals: money, not transparency. Germany and the UK began negotiations late last year. If key major players in the EU are lured into such preferential treatment with Switzerland, their incentives to put their weight behind the EU fully engage with the EU for a level playing field on tax issues beyond the EU-member countries (in order to include Switzerland) would be reduced.

An EU-wide coalition is necessary if the EU is to bring enough pressure to bear on Switzerland to reduce secrecy – and this new Swiss initiative seems aimed at removing the resolve of its two most powerful members. Others are increasingly indicating interest in this issue. Italy issued a ferocious warning recently that such behaviour undermines a common EU position towards increasing tax transparency via automatic information exchange.

A few days ago, Austria started expressly using these ongoing bilateral negotiations by Switzerland with the UK and with Germany as an excuse to incur further delay within the European Council on progress on automatic information exchange (see TJN Germany blog, in German). Austria’s Finance Minister Pröll has said that bilateral agreements between EU member states and with Switzerland may result in an uneven playing field at the European level.

Austria seems to be creating a pretext for vetoing progress on getting the EU to negotiate with Switzerland. However, if the UK and Germany persist with negotiations on bilateral withholding tax agreements with Switzerland, they become complicit with Austria, Luxembourg and Switzerland: they will be presenting Austria and Luxembourg with the gift of a political opportunity to stall. While Austria’s and Switzerland’s newspapers report on this crucial subject, media in Germany and the UK have so far ignored this issue.

This political mess incurs a serious risk of derailing, or at least impeding, progress on tax justice within the EU. If the UK and Germany were interested in transparency and the welfare of their citizens and of those in Europe, they would publicly announce the end of their negotiations with Switzerland on an anonymous final withholding tax, and publicly call on Austria and Luxembourg to end their veto in the European Council.

Secrecy is entirely, utterly incompatible with the economic needs of Europe.

Further, and crucially, there is great risk here of missing an opportunity for the construction of a fully functional information exchange system that could be implemented with an increasing number of countries – for the good of the majority of this planet’s population.

Are the UK and Germany interested in this?

Originally published on the Tax Justice Network blog…

* Image license:  Some rights reserved by Sputnikcccp, from Wikimedia Commons

Credit: TJN

According to this article, Luxembourgian Finance Minister Luc Frieden has indicated to the European Union’s Council of Finance Ministers (EcoFin) that the Grand Duchy is no longer opposed to automatic information exchange through the EU’s savings tax directive (STD). If this is the case, we have cause for celebration, though we still don’t know whether Austria will also fall into line and cooperate.

The EU’s STD is currently under review. The review process is considering broadening the directive’s scope to include a wider range of incomes (it currently only covers interest on bank deposits) plus a widening of the directive’s cover beyond natural persons to include legal persons such as companies, trusts and foundations. If these steps are agreed – and we understand that countries like the U.K. are blocking in order to protect their offshore tax evasion industries – the STD will become the global gold standard which other regions should aspire to in their efforts to tackle tax evasion.

The article indicates that M Frieden expects the EU to achieve agreement on the revised directive before year-end 2010, with the revisions coming into force by 2015. This timeline is less than ambitious, and will allow wealthy tax evaders plenty of time to re-design their tax evasion strategies, but even securing agreement will be a major political success in the face of such powerful vested interests. And even with Luxembourg in the bag, the U.K. is still likely to put up strong resistance to including trusts in the STD’s remit. Watch this space.

Switzerland on Tuesday signed a revised double taxation agreement with Luxembourg, easing the restrictions on the exchange of tax information between the two countries.

It is the second of 12 such agreements Switzerland needs to sign in order to be removed from the “grey list” of tax havens established in April by the Organisation of Economic Co-operation and Development (OECD).

Priceless.

WASHINGTON — Many Americans know that China holds the most U.S. Treasury debt, followed by Japan. But who would expect a group of Caribbean countries would collectively come in fifth?

Or that Luxembourg would come in eighth?

Continue reading at Google.com…

The Cercle has made an extremely important step towards a public debate on tax issues that is long overdue. The study has prompted a furious reaction from various quarterse including, for obvious reasons, Luxembourg’s finance industry, represented by the Luxembourg Bankers’ Association.

The bankers’ attacks, however, fail to address the main issues that the report identifies, but instead focuses on minor technical details — suggesting the study has correctly analysed the problem caused by Luxembourg. It is extremely important that this debate continue– and let us not forget that development NGOs have a moral responsibility to point to the negative effects of tax flight on development, under their mandates.

Read the full TJN blog post and link to the report here…

But there is an entirely separate side to this story that hasn’t permeated the coverage at all: the OECD standards are useless in any practical sense, and under these standards wealthy tax evaders will still feel perfectly safe stashing their money in Luxembourg.  As we discuss extensively on this website – the OECD’s standards require a tax haven to share a specific person’s bank account information with another country only if the requesting country can prove to Luxembourg that a certain person is evading taxes in the requesting country.  In short, as international tax law expert Jack Blum puts it, “If you have the information, we’ll give it to you.”  Of course, if you have the information, then you no longer need it, which is why we advocate a system of automatic exchange of tax information.

Of course, I then came across this story as I was flipping through news articles today on the Reuters website, which talks about how Switzerland may be coming off of the OECD’s grey-list in the near future.  The article concludes:

Switzerland is the world’s biggest offshore banking centre and the signing of the treaties is weakening its treasured bank secrecy. Austria and Luxembourg are both bank secrecy strongholds.

But again there’s no mention of what the OECD standards mean.  And, I suppose it is true that Switzerland’s banking secrecy is ever-so-slightly “weakened” by the treaties  (at least in a theoretical perspective), but in any pragmatic sense the treaties do nothing to assist foreign governments that are investigating tax evaders.  This is again why it’s so important for us to require automatic exchange of tax information.

Perhaps tomorrow I’ll wake up to read a story about the OECD grey-list which paints the whole picture.  Or perhaps I’m being overly optimistic.

But there is an entirely separate side to this story that hasn’t permeated the coverage at all: the OECD standards are useless in any practical sense, and under these standards wealthy tax evaders will still feel perfectly safe stashing their money in Luxembourg.  As we discuss extensively on this website – the OECD’s standards require a tax haven to share a specific person’s bank account information with another country only if the requesting country can prove to Luxembourg that a certain person is evading taxes in the requesting country.  In short, as international tax law expert Jack Blum puts it, “If you have the information, we’ll give it to you.”  Of course, if you have the information, then you no longer need it, which is why we advocate a system of automatic exchange of tax information.  (My friend, Nick Shaxson at TJN goes deeper into Luxembourg’s specific shortcomings in this post).

Nevertheless, there hasn’t been single mention of this caveat in any of the news coverage about Luxembourg’s TIEAs.  Indeed, save one Washington Post article, the mediocre coverage of the Luxembourg situation is sadly only emblematic of the news coverage surrounding TIEAs and the OECD’s grey-list in general.

It’s about time the news media cover both sides of this story rather than blindly buy into Luxembourg and other tax haven’s public relations campaigns.  This is a serious issue which costs developing countries in the hundreds of billions (if not trillions) of dollars each year – condemning many people to poverty – enables terrorist financing, and creates a shadow financial system which brought about the biggest financial crisis since the great depression.  It’s time we had serious coverage.

Luxembourg has revised its double tax convention with Norway to include provisions for the exchange of information in tax matters. The agreement brings the number of OECD model agreements it has concluded to twelve, ranking Luxembourg as a jurisdiction that has ‘substantially implemented’ the internationally agreed standard in this area.

As a consequence, the Progress Report initially published by the OECD Secretariat on April 2, 2009, in conjunction with the G20 has been updated, to move Luxembourg into the category of ‘Jurisdictions that have substantially implemented the internationally agreed tax standard’.

Continue reading at Tax-News.com…

Luxembourg Minister of Budget Luc Frieden concluded a new tax agreement with Dutch State Secretary of Finance Jan Kees de Jager on 29 May. The agreement will provide for the exchange of information in tax matters between the two countries in accordance with the OECD standard.

A statement from Luxembourg’s Ministry of Finance said that the protocol, which amends the existing double tax convention of May 8,1968, provides for the exchange of information on request in individual cases between the tax administrations of both countries. It applies to tax years 2010 and following and has no retroactive effect. The agreement does not seek an automatic exchange of bank information and does not allow for general inquiries, or so called ‘fishing expeditions’.

Continue reading the article at Tax-News.com…

PARIS (Reuters) – Luxembourg signed a new tax cooperation agreement with France on Wednesday that reduces the scope of its banking secrecy, one of over a dozen such deals it intends to reach this year to avoid being branded a tax haven.

Luxembourg Budget Minister Luc Frieden said he hoped the Grand Duchy would have signed 15 double-taxation deals by the end of 2009 that meet OECD standards on information exchange.

Continue reading the article at Guardian.co.uk…