Offshore withholding tax jumps up a ‘band’ .jpg

Offshore withholding tax jumps up a ‘band’


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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 EUROPEAN Union Savings Tax Directive was launched on July 1, 2005. Its’ aim is to ensure that all EU residents pay the tax due on their savings income, even if earned in another country or offshore financial centre.

The original objective of the Savings Tax Directive was that all EU Member States would freely disclose interest earned by a resident of an EU country to his home country. The aim was also for non-EU European countries (such as Switzerland, Monaco etc), and Member States’ dependent territories (such as the Isle of Man, Channel Islands, Gibraltar as well as some Caribbean islands), to automatically exchange information about interest earned for any EU residents.

However, as a ‘transitional’ compromise, some countries were allowed to implement an arrangement of deducting withholding (or ‘retention’) tax instead, thus maintaining their banking secrecy status.

The country collecting the withholding tax retains 25 per cent of the tax and remits 75 per cent to the Member State where the individual is resident.

Withholding tax is tax deducted at source on any interest earned by an individual. The rules do not apply to companies. It applies to bank interest, bond interest and income from bond funds, money-market funds, loans and mortgages.  The withholding tax is deducted by banks and other ‘paying agents’ in Andorra, Austria, Belgium, Guernsey, Isle of Man, Jersey, Liechtenstein, Luxembourg, Monaco and Switzerland. All other EU Member States, and Gibraltar, exchange information. Various Caribbean jurisdictions also participate in the Directive.

In the case of the Isle of Man, Guernsey and Jersey, customers have the option of authorising their bank to automatically exchange information with their home tax authority, instead of having withholding tax deducted.

When the Directive was launched in 2005, the withholding tax rate was 15 per cent. As scheduled, on July 1 the rate increased to 20 per cent. The next scheduled increase will be on July 1, 2011, when it shoots up to 35 per cent.

The withholding tax increase from 15 to 20 per cent means affected individuals are now paying 33 per cent more tax than they were a month ago.  With another, massive, 75 per cent increase in 2011, any individual holding a substantial sum of money would be wise to seek financial advice.

To make matters worse, the amounts of net interest earned will more than likely be ‘eaten away’ by inflation, leaving the capital ‘standing still’.

Same rules

In Portugal, interest from current and savings accounts is taxed at a flat rate of 20 per cent.  This is irrespective of the source and so includes interest from offshore bank accounts.

Portuguese banks deduct this tax at source and you must declare all external interest for tax.  The offshore tax rate and the local one are now aligned, but from July 2011, if you were still having withholding tax deducted, you’d effectively be opting to pay extra tax – 75 per cent more!

Bear in mind that even though the tax rates are the same, if you are a Portuguese resident you should be paying tax in Portugal rather than offshore, and you should always declare your offshore earnings on your Portuguese tax return even if withholding tax has been deducted. The same rules apply if you are a UK resident or resident of any other EU country.

Jersey has recently announced that its paying agents retained and passed to the Comptroller of Income Tax a total of 34.98 million pounds of retention tax for the year 2007.

Under the terms of its agreements with each of the 27 EU Member States, 75 per cent (26.24 million pounds) is sent to the individual State concerned, and the remaining 25 per cent (8.74 million pounds) is retained by the Comptroller of Income Tax.

For 2007, 61,600 individuals opted for voluntary disclosure.

The Comptroller of Income Tax and the President of the Jersey Bankers Association are both happy that the process of exchanging information and the retention of tax is working very well, according to the Jersey authorities.

In May, the Swiss government had announced that gross revenues collected from interest payments under the Savings Tax Directive had increased substantially between 2006 and 2007.

The Federal Department of Finance revealed that tax withheld on interest payments in Switzerland on earnings liable to tax in the EU increased from CHF536.7 million (331 million euros) for the tax year 2006 to CHF653.2 million for 2007.

CHF489.9 million in withholding tax revenues was transferred to EU Member States, and CHF163.3mn was kept by Switzerland. 10 per cent of the 25 per cent retained by Switzerland is passed on to the cantons.

The Swiss figures show that, of the withholding tax revenues transferred to EU Member States, the largest amounts were passed to Germany (CHF130.5 million), Italy (CHF125 million), France (CHF61.9 million) and the UK (CHF40.2 million).

Overall in 2007, in the region of 63,000 declarations were received. Approximately 55,000 declarations were received in 2006.

The withholding tax option is considered a ‘transitional’ arrangement by the European Commission.  EU tax commissioner, Laszlo Kovacs, recently insisted that he is “very much in favour of a final arrangement and a uniform arrangement”, adding that in the medium term “all parties to the Savings Tax Directive will exchange information rather than a withholding tax”.

He also plans to increase efforts to persuade other jurisdictions to abide by the terms of the deal, including Hong Kong, Macao and Singapore.