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| Grey areas in the EU directive
| JOHN SHENTON
Tax director, Ernst & Young |
Further to the recent ECOFIN meeting, no doubt there are a few sighs of relief following the decision to delay the implementation date of the EU Savings Directive to 1 July 2005.
However, businesses should not sit back and relax, as the postponement presents an ideal opportunity to assess the impact of the directive and to ensure the necessary systems are in place.
Jersey, together with Guernsey and the Isle of Man has agreed to implement a withholding tax regime – with the option to exchange information – on payments of savings income that fall within the scope of the directive. Locally the legislation has been put forward and agreed in principle by the States, and it is now up to the tax authorities to finalise guidance notes and address the remaining grey areas.
Broadly speaking, the directive will apply to all payments of interest to EU resident individuals and the person or entity responsible for the payment will need to comply with the necessary withholding/reporting requirements. While the position may be clear cut in a number of cases, for example a bank paying interest on a client account where the client is an EU resident individual, there are a number of areas which are not black and white – for example, payments of interest where there are a number of entities in the payment chain, outsourcing of the payment function and so on. While UK legislation and the relevant guidance notes have been in circulation for some time, notwithstanding that the UK will follow exchange of information, there are areas where local guidance notes diverge from the UK position. For example, as the islands do not have the relevant UCITS legislation, it has been necessary to clarify which collective investment schemes will or will not fall within the scope of the directive. This area is of paramount importance to the funds industry. Such an example among others exposes the potential for legislative and interpretational discrepancies across the EU.
Another area of the local guidance notes currently generating discussion is the existence of a provision to dis-apply the directive where the individual concerned would otherwise be exempt from income tax on the receipt of the specified income, or where no liability arises if the income is not remitted by the individual. The provision in respect of remitted income is ultimately aimed at UK non-domiciles (non-doms) who rely on remittance protection of foreign income. If interest received by UK resident non-doms is not to be remitted to the UK and therefore not subject to UK income tax, then in accordance with the draft guidance notes, the directive need not be applied on the payment of interest to that individual. From a practical perspective, it will be extremely difficult to implement systems where there are additional variables like the non-doms position, and this is echoed by the similarly subjective situation where an individual has more than one passport, and lack of information in respect of tax residency forces reliance on the individual’s passport. These examples among others highlight the fact that the paying agent will ultimately need to place reliance on the information received from their clients.
It is widely apparent that without black and white guidance, businesses are reluctant to fully embrace the directive. Advisers are unwilling to opine and those within the affected industries are hesitant to pre-warn clients. The grey areas and outstanding issues – not to mention the uncertainty surrounding the implementation date – have provoked a wait-and-see reaction with many. This is of course a natural reaction, as it would seem foolish and unwise to commit to investment without knowing the exact mechanics of what is required. However, while the nuts and bolts of the directive may still need to be tightened, it is crucial that businesses have all the necessary tools in place in order to prevent being left at the starting line. It is likely that the legislation and final guidance notes will be issued mid to late summer. However, we do not expect material changes to be made. Rather than expecting detailed definition prior to implementation, it is envisaged that some of the greyest areas may need to be dealt with in practice once the directive is implemented.
The future of the directive is definitely not black and white.
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