By: BILL BLEVINS
Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.
The EU’s infamous Savings Tax Directive enters its second phase in July, when the withholding tax rate on interest income applied by banks in various jurisdictions increases from 15 per cent to 20 per cent – a 33 per cent increase in the amount of tax to be paid.
In three years time, it will enter the next phase when the tax rate rises to 35 per cent – 133 per cent higher than the starting rate.
It is therefore certainly worth looking into the tax planning methods available which can result in you paying less tax in Portugal.
The EU introduced its Directive in 2005 to gain control of previously undeclared interest income flows, with particular attention being paid to offshore jurisdictions like the Isle of Man, Channel Islands and Switzerland etc.
Under its terms, most Member States automatically exchange information, though offshore jurisdictions are allowed to deduct a withholding tax (also called retention tax) instead, for an initial period.
Either way, interest earnings in the participating countries/centres are now always taxed, regardless of whether the bank account owner declares them on their income tax return or not.
Three years after the Directive came into force, the EU Commission is also working on improving its effectiveness.
At present, only European countries and dependent territories in the Caribbean apply the rules and some savers chose to move their money to Asia rather than declare their income or set up legitimate tax reduction structures like an insurance bond.
The Commission is therefore very keen to bring jurisdictions like Hong Kong and Singapore into the Directive’s remit.
While it certainly faces an uphill battle, you cannot completely discount the possibility – it’s not that long ago since most doubted that Switzerland would commit, and yet it did.
To start with, it is likely that the Directive will soon be revised so that foreign branches of banks, which have headquarters within jurisdictions covered by the Directive like the Singapore branch of a UK bank, will also have to apply the rules.
The increase in the withholding tax rate from 15 per cent to 20 per cent is significant because the Portuguese income tax rate on savings income is now 20 per cent.
Rather ironically, this means that you will now be paying exactly the same amount of tax if you use an offshore bank and have withholding tax deducted, than if you declared the interest in Portugal and paid tax locally.
From 2011, you would be paying much more tax offshore than here.
Theoretically, you should in fact always have declared the interest for tax in Portugal since you are liable for tax on your worldwide income, whether remitted to Portugal or not.
This is the case even if withholding tax is deducted from your account – this does not excuse you from declaring it in Portugal.
When the withholding tax shoots up to 35 per cent in 2011, you would be paying 75 per cent more tax than if you paid tax in Portugal, which would appear to be rather poor financial planning.
However, some people may need to think twice before starting to declare this income in Portugal, if they have not previously declared it.
The authorities may want to know where the income and capital has suddenly come from and look into how much tax they may have lost on it over recent years.
Anyone in this position should talk to their Portuguese based financial adviser sooner rather than later. The longer they leave it, the more consequences there may be to suddenly declare the account in Portugal.
Your adviser will discuss the alternatives that may be available to help you to bring your affairs into order.
It is very possible that through the use of legitimate structures like insurance bonds you will end up paying less tax than currently you do.
This obviously also applies for all those who already fully and correctly declare all their income in Portugal.
With appropriate legitimate arrangements in place, you will be able to lower your tax bill including any future UK inheritance tax liability, often very significantly, thus making Portugal your very own tax haven.
It’s always worth remembering that amending your tax planning to make it fully compliant with Portuguese law and to achieve the best possible tax savings results will make life easier for your heirs in future and save them tax too. It is not just the EU that is determined to stamp out tax evasion.
The recent revelations of tax evasion through Liechtenstein, by clients from all over the world, has thrust the issue back into the international spotlight.
HMRC acting chairman, Dave Hartnett, commented: “Tax evasion is a serious crime. Honest citizens have to meet the costs of the tax that is evaded by a minority who are dishonest”.
“Tax cheats deprive our public services of vital funding. Everyone is entitled to conduct their financial affairs in privacy but secrecy laws which facilitate tax evasion are completely unacceptable”.
In summary, earning interest offshore and keeping quiet about it is illegal, and in any case, you may be better off paying tax here in Portugal, especially if you use appropriate legitimate structures … and why pay more tax than you need to?