THE DIRECTIVE states that its objectives are best met by the ‘automatic exchange of information’. This means that details of the savings income of individuals are sent to the tax authority in their resident country, enabling the tax authority to assess these individuals to tax accordingly.
However, the EU has allowed three member states (Austria, Belgium and Luxembourg), the non-EU jurisdictions and UK Offshore dependencies to adopt the application of a ‘withholding tax’ to savings income for a transitional period. It is important to note that this transitional period does not have a fixed end date and will only finish when all of the above countries and territories, including the US, have agreed to the automatic exchange of information. It is unlikely that an agreement will be reached soon.
The withholding tax deducted will be at a rate of 15 per cent for the first three years, 20 per cent for the following three years and 35 per cent thereafter. Of this tax, the paying agent retains 25 per cent and 75 per cent is paid to the individual’s resident country tax authority.
Where withholding tax is deducted and paid over to the individual’s country of residence, it is important to note that the amount paid over, is the total amount generated by the paying agent in the year for all individuals resident in that particular EU country. No identifying information can be obtained by an EU member State’s tax authority from a paying agent, other than if the individual opts for the voluntary exchange of information. This may be preferable where the individual wishes to avoid having withholding tax deducted from their savings income. It is also possible for an individual to obtain a certificate from the tax authority of their home country, stating that withholding tax does not need to be applied as all savings income is declared and taxed accordingly.
For individuals who do suffer withholding tax, they may obtain credit from their home tax authority under the Double Taxation Relief provisions contained within the Directive. For the time being, this may prove more complicated with “black-listed” jurisdictions since current legislation prohibits tax benefits to be conceded to these jurisdictions. Time will tell whether this statute will change in light of the Directive.
For those individuals subject to ‘exchange of information’, the kind of information that will be passed to their home country includes: a) the identity, residence and fiscal number of the individual, b) name and domicile of the paying agent, c) the account number of the individual or, where there is none, the identification of the source of the income and information concerning the interest payments, although this may be restricted to the total amount of the income.
The Directive has indicated that where interest is paid after July 1 2005, but relates to pre July 1 2005, it may be split proportionately, but this will be at the paying agent’s discretion.