Fall


09


A
LEGAL
AND
ECONOMIC
ANALYSIS
ON
THE
EFFECTS
OF
THE
SAVINGS
TAX

DIRECTIVE

–
COMBATING
INTERNATIONAL
TAX
AVOIDANCE


Robert
Attila
Fussi
•
Alexandru
Catalin
Floristean

Supervisor:
Amin
Alavi,
PhD



Department
of
Business
Law

Centre
of
International
Business
Law





Aarhus
School
of
Business,
Aarhus
University

Hermodsvej
22

8230
Åbyhøj




Aarhus
School
of
Business

Aarhus
University

Fuglesangs
Allé
4

DK‐8210
Aarhus
V

Table
of
Contents

Table
of
Contents ........................................................................................................... ii


Chapter
I
–
Introduction.................................................................................................. 1

1.1
Preamble .................................................................................................................................................................... 1

1.2
Problem
Statement ................................................................................................................................................ 2

1.3
Research
Methods .................................................................................................................................................. 3

1.4
Contents
and
flow
of
the
paper. ....................................................................................................................... 4

1.5
Delimitations ............................................................................................................................................................ 7

1.6
Acknowledgements ............................................................................................................................................... 8

Chapter
II
–
The
World
of
Taxes ...................................................................................... 9

Introduction ..................................................................................................................................................................... 9

2.1
What
is
Taxable? ..................................................................................................................................................... 9

2.2
Tax
Avoidance....................................................................................................................................................... 10

2.3
Tax
Evasion ............................................................................................................................................................ 14

2.4
Theory
of
Punishment
vs
Tax......................................................................................................................... 14

2.5
Acronyms ................................................................................................................................................................ 16

2.6
Summary ................................................................................................................................................................. 17

Chapter
III
–
Timeline.................................................................................................... 19

Introduction .................................................................................................................................................................. 19

3.1
Prior
to
the
Directive ......................................................................................................................................... 20

3.2
The
dreaded
July
1st
implementation
of
the
directive ......................................................................... 22

3.3
Directive
comes
into
Effect
July
1,
2005.................................................................................................... 23

3.4
One
year
later........................................................................................................................................................ 25

3.5
Bank‐State
Relations .......................................................................................................................................... 27

3.6
Summary ................................................................................................................................................................. 28

Chapter
IV
–
The
2003
EU
Savings
Tax
Directive. ........................................................... 29

Introduction .................................................................................................................................................................. 29

4.1
EU
Tax
Savings
Directive.................................................................................................................................. 29

4.2.
Critique ................................................................................................................................................................... 36

4.3
The
concept
of
Information
exchange ........................................................................................................ 39

4.4
Summary ................................................................................................................................................................. 39

Chapter
V
–
Review
and
Possible
Improvements
to
the
Directive.................................. 41

Introduction .................................................................................................................................................................. 41

5.1
Outcome
for
the
first
three
years ................................................................................................................. 41

5.2
Economic
Data ...................................................................................................................................................... 42

5.3
Existing
Case
law ................................................................................................................................................. 50

5.4
Summary ................................................................................................................................................................. 55

Chapter
VI
–
Macroeconomic
Effect
of
the
Directive ..................................................... 57

Introduction .................................................................................................................................................................. 57



 

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6.1
Framework............................................................................................................................................................. 57

6.2
Law
of
Unintended
Consequences ............................................................................................................... 59

6.3
Tax
Harmonization
vs.
Tax
Competition ................................................................................................... 61

6.4
Summary ................................................................................................................................................................. 64

Chapter
VII
–
Remaining
Jurisdictional
Loopholes ......................................................... 66

Introduction .................................................................................................................................................................. 66

7.1
The
Bermuda
Triangle....................................................................................................................................... 66

7.2
The
New
OFCs ....................................................................................................................................................... 67

7.3
US
/
EU
Information
Exchange ...................................................................................................................... 69

7.3
Summary ................................................................................................................................................................. 70

Chapter
VIII
–
The
new
international
regulatory
framework ......................................... 71

Introduction .................................................................................................................................................................. 71

8.1
The
OECD
Model
Tax
Convention................................................................................................................. 71

8.2
The
agreement
on
Information
Exchange ................................................................................................ 73

8.3
Savings
Tax
Directive
vs
OECD
Approach................................................................................................. 75

8.4
Summary ................................................................................................................................................................. 79

Chapter
IX
–
Final
Conclusions ...................................................................................... 81

9.1
The
world
of
Taxes.............................................................................................................................................. 81

9.2
Supranational
Legislation ................................................................................................................................ 84

9.3
The
movement
back
to
bi‐lateral
agreements ........................................................................................ 86

Authorship
commentary............................................................................................... 89


Bibliography ................................................................................................................. 90


Annexes .......................................................................................................................... I

Annex
1:
Table
of
jurisdictions
affected
by
the
STD ........................................................................................ I

Annex
2:
Bilateral
agreements
on
information
exchange
on
tax
matters ........................................... III

Annex
3:
Jurisdictions
that
have
substantially
implemented
the
internationally
agreed
tax

standard ........................................................................................................................................................................... VI

Annex
4,
List
of
the
30
Members
of
the
OECD .............................................................................................. VIII

Annex
5,
Article
26
of
Model
tax
Convention....................................................................................................IX

Annex
6,
The
Savings
Tax
Directive ......................................................................................................................XI

Annex
7
OECD
Model
Agreement
on
Information
Exchange ...............................................................XXXI



 

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Chapter
I
–
Introduction


1.1
Preamble


The European Union is, taken as a whole, a very high tax area. It has the highest
Tax-to-GDP ratio in the world, standing at 39.8% of GDP for the EUR – 27 Member States
in 2007, more than 12% higher than the figures recorded in the United States and Japan1. At
the same time, it is also among the wealthiest regions in the world, with GDP per capita
recorded in 2006 for the same EUR – 27 at 24700 in PPS (Purchasing Power Standards),
while the US and Japan show higher figures, the gap being due to considerable differences
between the rich and poor countries of the EU (Ranging from 251% to 48% of average),2
an issue which is high on the EU policy agenda. Tax-to-GPD ratio’s are even higher in the
richer countries of the in Europe, with the highest being in Denmark – 59%; Sweden,
56.44% and Belgium with 54%. Out of the EU 27 only 8 countries show figures lower than
35% and those are: Cyprus, Latvia, Lithuania, Estonia, Slovakia, Romania, the Check
Republic and Bulgaria.
In a region in which wealth is abundant and where tax burdens are amongst the
highest in the world, we believe, that the incentive to try to avoid taxation is high due to the
considerable pay-offs that are achieved by successful tax dodging.
In light of the recent year’s financial crisis, it was believed that, because the EU
applies such an extensive and well-developed welfare system, supported by the highest
taxes in the world it would have coped a lot better with the recession, however the effects
have proved to be comparable to those in the US where the crisis originated. In light of this,
questions have been raised regarding the fiscal policy of Member States and on the means
to improve it. This paper sets out to research the optimal level of national and supra-
national legislation required in the field of taxation in order to answer the need for fairness
and budgetary needs in the aftermath of the financial crisis. We will look into EU level

1
“Taxation trends in the European Union 2009 Edition“ Prepared by Eurostat and European Commission
Directorate General for Taxation and Customs Union
2
Eurostat Press Office: STAT/06/166, Date: 18/12/2006
legislation that has tried to touch upon the very delicate and political issue of taxation and
asses it’s effectiveness, raising questions as to whether such legislation should be
developed further or better left to individual member states to regulate by themselves.

1.1.1
EU’s
attempt
to
legislate
income
tax


Negotiated for fourteen years, finally adopted in 2003 and came into force on the
1’st of July 2005, the European Savings Tax directive, was supposed to be a core
instrument for identifying capital held abroad by EU tax nationals that were attempting to
avoid taxation. It should have brought billions of Euros’ to national budgets and was hoped
to lead to the repatriation of capital to their home countries, having lost the incentive to
keep it offshore. Due to it’s many flaws and loopholes the directive proved to be
unsuccessful in it’s aims and possibly produced some negative effects, after four years of
strong debate, the issue of information exchange is now being tackled with a more
international consensus and developments in this matter are expected soon. This paper will
research the history of Information exchange policy, the impact of the European Savings
tax directive and it’s much needed reform.

1.2
Problem
Statement


This paper sets out to research the legal framework currently in place at a national,
regional (EU) and international level dealing with taxation of natural persons.
The analysis begins with the incentive of individuals to try to find legal means of
avoiding taxes in their own country and the assessment of the economic implications of
such an action, the impact it has on the common market, and on free movement of capital.
In order to develop the right legislative package, in the current stage of the common
market, the EU Member States have used both regional and international forums. This
paper will try to assess the current legal framework in place from an economic and legal
perspective. The developments in time and scope will be broken down and studied in detail
thought the paper.
Based on the principle of subsidiarity and proportionality we will try to strike the
balance found between the shared competences of national governments and the EU as a
whole in order to provide a better level playing field for the free movement of capital.


 

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1.3
Research
Methods


Our methodology in the conception phase of this paper consists mainly in the
analysis of existing legislation using a positive approach, we have taken steps to find
relevant legal sources, existing legislation in force at the time of writing as well as
international agreements and soft law and asses their impact in regards to their desired aims
and goals versus their actual effect in the real world. The economic impact of legislation
was extracted from secondary data provided by established statistic institutions like
Eurostat. Due to the novelty of the subject and possibly other factors case law on this topic
is not extensive; it was thusly difficult to develop our analysis from a legal point of view.
We have used for this purpose official positions of the commission, working papers,
academic articles and established journalists opinions.

1.3.1
Legal
Sources


In the writing of this paper, the most important research method used was the cross-
referencing of legal sources, either national or at EU level, which dealt with taxation.
Sources for EU legislation are transparent, and easily accessible via community databases,
while national legislation has been researched through compendiums and statistical papers
prepared by Eurostat or the OECD, which compile key national figures, and important tax
related measures.

1.3.2
News
Articles


Research of news articles has been a central part of our preparation of sources, in
order to globally understand the impact of specific legislation we used academic databases,
which contained a very large base of press releases and news articles from 2005 to date. It
was crucial to our understanding of the legal and economic impact of certain key measures
to witness how the press and analysts commented on the issue. The same sources contained
exact quotes of politicians, economists, government officials and bankers on topics of
interest to our paper.

1.3.3
Case
law


Another important source for our research are the on-going cases pending before the
ECJ, because the issue is still relatively new, there have been no decisions on any of the


 

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matters yet, however there are cases based on article 226 EC infringement procedure
pending out of which clear positions of the commission and the advocate general can be
researched and quoted.

1.3.4
Working
Papers
and
estimates


The OECD also provided a large array of working papers relevant to our
understanding of the importance the issue of information exchange has on the G 20
countries agenda, and their political determination and commitment in putting an end to tax
havens around the world.
Statistical data on GDP and GDP per capital, Tax levels, Tax-to-GDP ratios, min
and max tax brackets, PPP and PPS figures for OECD and EU countries, as well as
comparative figures for the last decade were strongly used to analyze the taxation trends.
Lastly, tax evasion cannot be pinned at an exact value, and in order to correctly
analyze the size of the phenomenon a very wide range of estimates has to be used,
unfortunately many of these estimates are speculative and biased to a certain interest group
either affiliated with either banking institutions interested in minimizing the impact of tax
evasion via offshore accounts or with OECD governments, set on making the issue as
serious and as negative as possible in order to push stronger and harder regulation in the
field, with the aim of increasing their budgetary revenues.

1.4
Contents
and
flow
of
the
paper.


This paper is organized in 9 chapters, each chapter dealing with a specific part of
our researched topic. In the introduction chapter we have looked at the international and
economic setting that is ongoing at the time of conception of this paper as well as at the
reasons which have sparked the debate on tax issues and information exchange policy of
the EU.
The first chapter of this paper, the introduction, will provide the problem statement,
research methods, limitations and a short insight on the topics that will be tackled later on.

Chapter II will try to shed some light into accepted definitions of the terms that we
will widely use in the other chapters, it is meant to serve as a booklet of information in


 

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order to open the lecture of this paper to a wider base of readers and possibly to clear up the
meaning of the some ‘debatable’ terms such as the meaning of ‘tax evasion’, ‘tax
avoidance’ and how it should be understood within our paper. Within this chapter we shall
also explain and define any acronyms that are used later within the paper. We will also try
to look into explaining the various way of tax dodging, and explain the legal differences
between tax fraud and tax evasion, as supported by the Swiss Federation and relevant to our
discussion.

In Chapter III we will build a historical timeline of the actions that Member States
have taken in order to combat tax evasion, as well as look into why the results that
legislators were hoping for were not reached. This chapter will engage in narration of facts
and events that have been landmarks in the increasing political commitment to crackdown
on tax protestors. The international playing field for banks and their relationships to
customers and governments has changed considerably during this period and we will
analyze the reasons and effects of this relationship change. We shall widen the scope of
analysis for the purposes of understanding the international setting of events, including in
our discussion the developments that took place outside the EU, specifically in the US and
the overseas dependent territories.

Chapter IV will constitute the focus of this paper and it will be divided into two
subchapters. The first subchapter will be dedicated to the analysis of the European tax
savings directive, the initial goals, aims and objectives of the directive, it’s coming into
force and it’s actual effects on capital movement, budgetary revenues and inter-
governmental relationships. In the second subchapter we will analyze current case law,
based on this directive, which is currently at the core of an article 226 EC infringement
procedure case lodged against Luxembourg in front of the ECJ on the wrongful
implementation of the 2003 version of the directive. We shall also analyze other cases
pending in front of judicial courts relating to the global aspect of the information exchange
doctrine, as envisioned by the OECD and the EU we will look at cases against UBS in the
US and France and their impact of Swiss banking secrecy laws.


 

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 In Chapter V we will take notice of the recent developments brought on by the
critique of the initial Savings Directive and analyze the planned changes to the issues,
based on the Council’s review of the results and the heavily criticized loopholes present in
the legislation. This chapter will also analyze the future of banking secrecy laws, which
have caused a strong debate on the transposition of the directive by means of a withholding
tax for a transitional period and their role in unbalancing the leveled playing field for the
banking market. The Commission’s own assessment of the Directive is a very relevant
source of this chapter and explicitly points out loopholes that have to be addressed in a
future legislative act. Because this chapter is mainly based on a very thorough economic
report prepared by the commission the readers may find it very technical, we have however
taken steps to ensure that the points made within chapter and accessible and understandable
by a wider range of readers.

Chapter VI will also be tied into the Savings Tax Directive discussion, but from a
different perspective. In light of the economic crisis, measures in place after 2005 have
caused possible negative and serious, unintended macroeconomic consequences. This
chapter seeks out, on a theoretical basis, to describe the implications of the EU information
exchange policy, as it was implemented in 2005 on European economies. It specifically
will look into the possibility that capital flight has flown into the extremely high growth
Asian markets, which contain a much liberal stance of taxation and information exchange,
due anticipated results of the directive. Although conclusive data cannot be gathered to
statistically support the results of this chapter, due to the various other macroeconomic
shifts that have affected the world economy in the last 4 years, the results in this chapter are
built on a ceteris paribus, economic model assumption and can be used to help future
legislation reach better results.

Chapter VII is dedicated to the analysis of the geographical and jurisdictional

loopholes that were inherent with the 2005 directive, some of which were not preventable,
such as the introductions of Singapore, Hong Kong or Dubai into the Information exchange
regime envisioned by the legislators, but others which were questionable, such as the


 

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failure to include Bermuda as a jurisdictions where provisions equivalent to the EU
legislations will apply.

Chapter VIII will be reserved for potential solutions to the jurisdictional and
substantial loopholes still present in legislation and will analyze the negotiations that the
OECD is currently engaged in for the signing of Bi-lateral agreements with the financial
centers presented in chapter 7. This chapter will also deal with the effects of other financial
instruments not covered by the 2005 or the 2009, like shares, trust funds, variable debt
instruments, etc. We shall also look into the planned changes to the directive and their
potential to offset the further goals tax evasion legislation. The alternatives to EU
legislation are analyzed in this chapter.

Chapter IX contains our personal conclusions on the matter of tax avoidance and
our review of the heavily political legislation passed in the recent years, this chapter will
contain reasoned opinions regarding the unwanted effects that have been caused by existing
legislation and we will try to envision better solutions that tackle the need for fairness and
economic wellbeing for Europeans in the years to come.

1.5
Delimitations


The specific topic could have been approached from a very large number of
perspectives, our initial research topic was supposed to uncover the most common ways of
tax avoidance by EU nationals and asses the economic impact of such an action on the
common market. We have, however, realized that the EU is at crucial step in shaping it’s
future power on tax legislation, the historical monopoly of member states to fully regulate
matters on taxation may be shifting, allowing more room for supranational legislation and
mixed competencies. This will become the central pillar of our research paper, and we will
look into a wider range of issues that relate and shed more light into the approach that the
EU will have on this matter.
We will not touch on matters related to corporate taxation more than it is necessary
to understand it’s relationship with the EU role as legislator, We acknowledge that
corporate taxation is in a deeper stage of integration and is slightly more harmonized and


 

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regulated at a EU level than individual taxation, however our focus will be strictly related
to the taxation of natural persons, enlarging the discussion to include corporate taxation will
greatly dilute our research findings.

1.6
Acknowledgements


This paper was conceived and written by two authors, Floristean Alexandru Catalin
and Robert Attila Fussi, while we have taken steps to ensure that our work will be as
uniform and as homogenous as possible, the readers may encounter throughout the text a
certain degree of originality in style. This could not be avoided; certain dissimilarities in
style, language and wording are present due to the different backgrounds and personality of
the two writers. We hope that this will be to the benefit of the reader, having the possibility
to see the topic from different perspectives and relate to the writing style that he or she is
more accustomed to.


 

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Chapter
II
–
The
World
of
Taxes

In this world, nothing is certain but death and taxes.
Benjamin Franklin

Introduction


One of the core principles in the European Union is the freedom of movement of
capital EC Art. 56 - 60 but does that really mean? We have all heard of tax havens and tax
evasion, but the truth is that tax evasion is illegal but avoiding tax isn’t. According to the
United States Supreme Court that “The legal right of an individual to decrease the amount
of what would otherwise be his taxes or altogether avoid them, by means which the law
permits, cannot be doubted.”3 Hence tax avoidance is the legal utilization of the tax regime
to one’s own advantage, to reduce the amount that you’re liable for with the limits of the
law. Tax evasion is the contrary, which means that the efforts extend to illegal means.
In recent news we have heard a lot, especially in Germany where wealthy individuals
have foregone paying their full duties to the state. These people are referred to as tax
protesters, an unsuccessful one has attempted to openly evade tax; while the successful
ones avoids tax. But this phenomenon is not only particular to one single state but rather a
global phenomenon, which has lead the European Union to draft a directive to counter
these efforts and assist member states, since no single state can tackle this issue by
themselves. Especially since one of the fundamental rights of a European citizen is the
freedom of movement of capital.
Therefore, in this chapter we will define what is taxable in general, and present the
difference between tax evasion and avoidance in regards to compliance, and the traditional
model of tax compliance.

2.1
What
is
Taxable?


In principle, residents are subject to tax on their worldwide income, unless otherwise
provided by a tax treaty. Non-residents are subject to tax on their local income source only.
3
Gregory v. Helvering, 293 U.S. 465 (1935)


 

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While is different from country to country, we will acknowledge this basis as a general
statement. There might not be a definition of taxable income; generally speaking, taxable
income is the total of the net results of each of the taxpayer’s income categories such as;
• Employment income (including income from prior employment)
• Business income
• Income from immovable property
• Agricultural income
• Professional income (income from “non-commercial” activities, for example from
legal and medical professions and income from activities not classified into any
other category)
• Income from activities performed by certain managers controlling family companies
or limited partnerships
• Investment income (income from movable property)
• Capital gains4
To know the legislation is in your country please refer to your local tax authority and
a look at the European Tax Handbook, which covers Corporate Taxation and Individual
Taxation.

2.2
Tax
Avoidance


Tax avoidance is the legal utilization of the tax regime to one’s own advantage, to
reduce the amount that you’re liable for with the limits of the law. Hence if one is avoiding
tax one is still in compliance with the law. Generally there are three means of tax avoidance
that are valid throughout the tax regimes, tax residence, double taxation, and the creation of
legal entity.5

4
Juhani Kesti, European Tax Handbook 2009, June 2009, pg 233
5
According to the New York Times article on October 20, 2006 by Floyd Norris, Fortune 500 companies
have started to patent their company’s tax-avoidance strategies of which 49 have been patented.
http://www.ctj.org/blog/2006/10/patently-absurd-tax-avoidance-strategy.html


 

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2.2.1
Tax
Residence


One-way, a person (or company), may lower their taxes is by changing the
perspective tax regime to a tax haven or by becoming a perpetual traveler6. However this
might not work in all cases, in countries such as Denmark and the United States. These
countries tax their citizens, permanent residents and companies on all their worldwide
income. In these cases, simply moving abroad or transferring assets cannot avoid taxation.
This has lead to tax migration or even in extreme cases to expatriation, which in the end
means lost revenue for the state.
Tax residence it defined differently in different countries and hence they have
different standards to determining tax residency. Generally this is determined by an
individual’s physical residence in a particular country by the amount of day which one
spends there per year. For example in the UK one has to be physically present for a
minimum of 183 days a year, so “six months”, to become resident for tax purposes. Anyone
born in the UK and whose permanent and natural home is there is considered a UK
domicile. In France and the US, the qualifying time for residency for tax purposes is two
years. Since there is a difference between legal residence and tax residency, it has led to
instances where individuals are liable for taxes in more that one country at a time. So the
problem could lie whether one ceases to be a resident in a country such as the UK if one is
a national. It is possible to be a dual resident, so there may be a dual tax issue to be sorted
out. If that person then ceases to be a resident in the UK, the tax rules of the residence do
apply.7 Bi-lateral treaties regarding double taxation have hence been regulated in order to
avoid people from migrating to a tax haven.

6
Perpetual travelers are people who in such a way that they are not considered to be a legal resident of any
country in which they spend time. By lacking a legal permanent residence status, they seek to avoid the legal
obligation, which may accompany residency, such as income and asset taxes and military service.
1. Passport and Citizenship - in a country that does not tax money earned outside the country
2. Legal Residence - in a tax haven
3. Business Base - where you earn your money, ideally somewhere with low Corporate tax rates
4. Asset Haven - where you keep your money, ideally somewhere with low taxation of savings interest
and capital gains
5. Playgrounds - where you spend your money, ideally somewhere with low consumption tax and VAT
7
Is this the end of offshore investing?, Money Management, Financial Times, Business, June 1, 2006


 

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2.2.2
Double
Taxation


Before the entry into force of the Tax Savings Directive the only means of regulating
international tax matter of natural persons was through the use of bi-lateral tax treaties
between countries, their main defense for existence in the eyes of individuals was their goal
to ensure that no individual is taxed twice both in the country that is generated in as well as
in the host country. This was especially important in jurisdictions that tax their residents on
their global income and not just that which is raised nationally.
In order to avoid taxing nonresidents twice, many countries have entered into bilateral
double taxation treaties. Since most countries impose taxes based on income gained or
gains realized within that country regardless of where the individual has its residence.
However there have been relatively few double taxation treaties with countries considered
as tax havens.8 Generally, it not enough to simply move one’s assets to a tax haven in order
to avoid tax, one has to also personally move to a tax haven and in extreme case such as the
United States give up one’s citizenship. It has been estimated that half of all the money in
circulation worldwide either resides or passes through such tax havens.9

2.2.3
The
creation
of
a
Legal
Entity


Another option, if one doesn’t wish to change one’s residence is to consider where it
would be beneficial to have the assets transfer or donated to a separate legal entity. This
often can be done through the creation of a company, trust, or foundation. Assets are
transferred to the company or trust so that income earned is within this legal entity rather
than by the original owner. One may wonder what the benefit is, quite simply, one is
usually taxed on property and earnings on interest earned that one actually owns. By
donating assets to a separate legal entity one can avoid personal taxation. The legal entity
might still need to pay corporate taxes but as we can see below corporate tax is significantly
lower that personal tax.

8
There are certain well-known exceptions to this: Cyprus has a heavily exploited double taxation relief treaty
with Russia; another frequently used treaty is the double taxation relief treaty between Mauritius and India.
There are also a number of other less well known and less frequently utilized treaties, such as the one between
the British Virgin Islands and Switzerland.
9
Marcel Cassard, The Role of Offshore Centers in International Financial Intermediation, Washington, IMF,
September 1, 1994, IMF Working Paper WP/94/107


 

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Graph
1:
Top
Personal
Tax
vs.
Corporate
Tax10


70


60


50


40


30


20


10


0

Netherlands


Austria

Germany

France


United
Kingdom


Hungary


Lativia

Lithuania


EU‐27

EU‐25

Belgium


Italy


Portugal


Czeck
Republic


EA‐16

Luxembourg


Cyprus

Malta


Estonia


Bulgaria

Slovenia


Romania

Spain

Denmark


Norway

Poland


Slovakia

Sweden


Greece

Ireland

Finland


Top
Tax
rate
on
personal
Income
2008
in
%

Statutory
tax
rate
on
coporate
income
2008,
in
%;
adjusted




When the assets are transferred back to the individual, such as in the case of
liquidating the legal entity, then capital gains taxes would apply on all profits.
Furthermore, this separate legal entity might also be able to avoid corporate taxation
should it be incorporated in an offshore financial jurisdiction such as the Isle or Man.
Income tax would still be due on any salary or dividends drawn from the legal entity. In
terms of trusts, one has to look at the specific legislation in the jurisdiction in question to
know the guidelines that regulate trusts. In some cases the settlor (creator of the trust) might
not also be the beneficiary of the trust.

10
“Taxation trends in the European Union 2009 Edition“ Prepared by Eurostat and European Commission
Directorate General for Taxation and Customs Union, Annex B, Table C & D


 

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2.3
Tax
Evasion


In comparison, tax evasion is the deliberate misrepresentation or concealment of the

true state of one’s affairs to the tax authorities in order to reduce one’s tax liability and
dishonest tax reporting. Either by declaring less income, profits, or gains than actually
earned or overstating deductions. Hence lowering the amount due by illegal means.

2.3.1
Tax
evasion
is
criminal


Probably the best example of using taxes, as a method to capturing a criminal, was Al
Capone the way the US government got to him was by charging him with tax evasion
which lead to his indictment. All income earned is tax liable, even if it is obtained by illegal
means. It’s not surprising that criminals do not file these earnings. In James v. United
States, the United States Supreme Court ruled that money obtained by a taxpayer illegally
was taxable income, even through the law might require that the taxpayer to repay the ill-
gotten gains to the person from whom they had been taken. Eugene James was an official in
a labor union who had embezzled more than $738,000 from union funds and did not report
these on his tax returns.11 In Al Capone’s case the authorities were not able to prove his
guilt on criminal charges, but hence they were successful in prosecuting for tax evasion.

2.4
Theory
of
Punishment
vs
Tax


The traditional model of tax compliance by Alligham-Sandmo 1972, which was

based on the theorized economics of crime by Noble laureate economist Gary Becker in
1969, deals with the evasion of income tax. According to them, the level of evasion
depends on the level of punishment provided by the law.12The threat of the probability of
an audit combined with the penalty associated to that makes people pay their taxes,
however the is also a vast amount of experimental literature that suggests that there are
people who never evade, even when the probability of detection is zero.13 Since taxes are
the main source of income within the developed world, this is serious concern to those
11
366 U.S. 213 (1961)
12
Allingham, M. G. and A. Sandmo [1972] ‘Income Tax evasion: A Theoretical Analysis’, Journal of Public
Economics, Vol.1, 1972, p.323-38.
13
According to Alm et al., 1992, Baldry, 1986 and Webbley et al., 1991 in the article by Laura Sour, An
Economic Model of Tax Compliance with Individual Morality and Group Conformity, Sept 18, 2003, pg 44


 

- 14 -


 

nations. Hence they have developed rules of compliance in accordance to requirements that
require proper and timely reporting of the tax-payers all required tax returns. But we are
human so mistakes occur. As long as this was not intentional, it is not necessarily a crime
as in the case of Switzerland. However, even in Switzerland, fraudulent tax conduct is
criminal, for example, deliberate falsification of records. So the difference between
Switzerland and other countries, while significant, is limited. Normally, the higher the
evaded amount, the higher the degree of punishment: in China, it might as severe as the
death penalty. But the line between tax evasion and avoidance can become very fuzzy;
consequently, tax authorities, lawyers and taxpayers find it hard to agree about the majority
of the ambiguous cases.14
We acknowledge that fact that moral and social norms do effect the level of tax
evasion in an individual however for this will look at the simple version of the Allingham-
Sandmo model, where the possibility of avoidance does not exist and the taxpayer is risk
neutral. In this framework, the taxpayer decided how much of their income to report by
solving an expected utility maximization problem. Therefore the choice of whether and
how much to gamble is his/her trade-off between tax savings from underreporting and the
risk of audits and penalties should they get aught for noncompliance.
E[U] = (1-p) U [y(1-t) + t(y-x)] + pU [y(1-t) – s(y-x)]15
The taxpayer must choose how much income x to declare to the tax authorities so
that he maximizes his expected utility. Y represents the true fixed income, which is only
known by the individual. T is the constant tax rate. Hence y(1-t) is the true amount left after
tax. P represents the constant probability of being audited. Should the individual be
detected then S is the constant penalty on all the unreported income. The solution of the
model indicates that an individual will report zero income whenever the audit probability
he faces is less than t / (t+s). It is understandable that other factors affect the decision
process of the individual.

14
Laura Sour, An Economic Model of Tax Compliance with Individual Morality and Group Conformity, Sept
18, 2003, pg 45
15
Allingham, M. G. and A. Sandmo [1972] ‘Income Tax evasion: A Theoretical Analysis’, Journal of Public
Economics, Vol.1, 1972, p.323-38


 

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2.5
Acronyms


Throughout the course of this thesis we will use a series of acronyms and terms that
we consider should be explained early in the paper, in order for the reader to receive the
most out of his lecture we think that some of these terms should be detailed here rather than
in the annex part of our paper.
We would also like to add that we may have used some terms inter-changeable, we
will try to mention these terms in this section.
STD – Savings tax Directive, otherwise known as Council Directive 2003/48/EC of
3’rd of June 2003, on taxation of savings in the form of interest payments. The study of this
directive takes a central role in our paper, and will be referred to in numerous chapters; we
may also abbreviate it as TSD or just Savings Directive.
PPS (Purchasing Power Standard) and PPP (Purchasing Power Parity) will be used
in the introductory chapters in order to give an accurate picture of the real tax rates
currently in place on the worldwide arena, we have used Purchasing Power Parity standards
in order to correct for fluctuations on exchange rates around the world and provide a better
outlook into the real taxation figures.
OECD is the Organization for Economic Co-operation and Development, it
currently has 30 members which are listed in Annex 4, according to their website, their
mission is to bring together the governments of countries committed to democracy and the
market economy from around the world to: Support sustainable economic growth, Boost
employment, Raise living standards, Maintain financial stability, Assist other countries'
economic development, Contribute to growth in world trade. The Organization provides a
setting where governments compare policy experiences, seek answers to common problems,
identify good practice and coordinate domestic and international policies. Their role
however in the international taxation arena will be explained in detail in chapter 8.
OFC or Offshore financial centers are a key part of our paper, they are defined
loosely and generic as low-tax, lightly regulated jurisdiction which specializes in providing
the financial, commercial and corporate infrastructure to facilitate the use of that
jurisdiction for the formation of offshore companies and for the investment of capital


 

- 16 -


 

funds16. In this paper, we will use this term very broadly to encompass and jurisdiction
capable of attracting capital movement with the purpose of avoiding or lowering the tax
burden owned in the home state.
Retention tax and Withholding tax are used interchangeable and refers to the tax
defined and imposed on individuals holding savings account in countries which have not
yet implemented the automatic information exchange regime as requested by the STD. A
complete definition and description of this tax is presented in chapter 4. Sufficient to say at
this point that the Retention tax is the equivalent of the withholding tax is non-EU countries
which are subject to provisions identical to Council Directive 2003/48/EC.
UCITS or 'Undertakings for Collective Investment in Transferable Securities') are
covered by a set of European Union regulations17 that aim to allow collective investment
schemes to operate freely throughout the EU on the basis of a single authorization from one
member state. The way they work is a public limited company (such as a bank or
investment management fund) coordinates the distribution and management of unit trusts
and funds amongst countries within the European Union. These funds can be marketed
within all countries that are a part of the European Union, provided that the fund and fund
managers are registered within the domestic country. The regulation recognizes that each
country within the European Union may differ on their specific disclosure requirements.

2.6
Summary


In this Chapter we have provided the reader with basic background knowledge to
understand the future subject matter. We discussed the issue of compliance with the tax
authorities in order to understand the difference between tax evasion and avoidance. In
order to understand that issue one needs to know what is actually liable which we defined
in what is taxable. As we could see in comparison of personal tax to corporate tax, there are
several countries where it would be advantageous to find the means to legally avoid the
duties the individual has towards society. However as we could also see in the Alligham-
Sandmo model, while it would be in everyone’s personal interest to do so, the general trend
16
Offshore Financial Centres, Richard Roberts, Edward Elgar Publishing (March 1994)
17
For further reference refer to European communities (undertakings for collective investment in transferable
securities) regulations 2003 (SI 211 of 2003)(as amended)


 

- 17 -


 

is not to do so, for fear of audits and penalties associated to that extent. In Chapter 3, we
will see how HM Revenue and Customs has threatened their tax residents. Finally we have
given the reader a reference sector for main terms and concepts used throughout this paper.


 

- 18 -


 

Chapter
III
–
Timeline


Introduction


While offshore financial centers have been around for the better part of the 20th
century and sure to remain well into the 21st century, it is important to look at the events
that have led up to the development of the Savings Tax Directive. What invoked the
member states and commission to take action and put this industry into the forefront of the
public eye?
With many governments and NGOs keen to crack down on criminal financing in
wake of 9/11 attacks and on the commercial wrongdoings following the Enron scandal, the
financial regulation on the Offshore Financial Centers (OFC) has become an increasingly
pressing issue. But what constitutes as an OFC? The classic examples would be the
Cayman Islands, but is London for example an OFC? Richard Hay of Stikeman Elliott
pointed out: “Sixty percent of all offshore services are sold in London, Tokyo, and New
York.” There is no doubt that the increased importance of such centers plays on national
and international economics. The media’s attention on OFCs stems from the feeling that
they represent a trend towards jurisdictional and regulatory shopping, which is of course
understandable when funds are registered in the Cayman Islands or Guernsey, listed in
Dublin and handled from an investment management point of view in London.18
Hence in this chapter we will build a historical timeline of the views and action that
lead the Member States to take action, as well as look into why the results that legislators
were hoping for were not reached. We will engage in narration of facts and events that have
been landmarks in the increasing political commitment to crackdown on tax protestors as
well as the international playing field for banks and how their relationships to customers
and governments has changed considerably during this period.

18
Des Cahill, Offshore: Its place in the sun, Legal Week, October 28, 2004


 

- 19 -


 

3.1
Prior
to
the
Directive


While OFCs have often been considered synonymous with tax havens, the line is
very grey. In light of Special Member State territories and the EU such as Isle of Man,
Jersey, and Guernsey, they are not really defined, which makes it difficult for the
community. While they enjoy several privileges of the EU they are not subject to the EU’s
many and various directives. Sure the OECD has classifications on what is on the white list,
grey list and black list, but more often than none these classifications are politically driven
as we shall see later.
In terms of regulation, the fact was that the Channel Islands and the Isle of Man sit
outside the EU means that they are not subject to the EU’s many and various directives,
whether they are on savings, the EU Prospectus or on market abuse. The islands
relationship with the EU is founded on Protocol III of the Treaty of Accession in 1973,
which allows these islands to enjoy the advantages of free trade with the EU without being
subjects to its laws. According to David Moore, a partner at Ozannes19, “the relationship
with the EU is important and should be addressed, the challenge is to mix and match
structures to meet the requirements of investors, whether those are essentially EU or
offshore.”20The definite disadvantage is for these OFCs, especially the ones that are under
the Special Member State territories since other countries set their rules. Richard Hay says
that regulation is the mantra of the onshore countries, bodies such as the Financial Action
Task Force (FATF) and the OECD exclude jurisdictions like Guernsey, but they set the
regulatory agenda. OFCs are on both sides of the line, in a way, but they are not allowed to
self-determine their direction. Rather outside forces drive them by unilaterally setting up
the environment in which they operate. But as we will see OFCs play a big role in today
internationalized environment, so the consensus is that they need to be involved in the
decision making process.21
In the late 1980’s, cash-strapped countries, such as Germany and France, where
looking at different ways to retain taxes within their jurisdiction. The problem was the

19
Ozannes is a law firm with a dynamic approach to provide corporate and private clients with integrated
legal services across all practice areas particularly with international financial services
20
Des Cahill, Offshore: Its place in the sun, Legal Week, October 28, 2004
21
Des Cahill, Offshore: Its place in the sun, Legal Week, October 28, 2004


 

- 20 -


 

historic low interest rates as well as the fact that many investors started restructuring their
deposits in ways to legally avoid paying anything to the tax authorities. While Switzerland
for many years has been a sore for the countries like Germany and France, most European
nations have been trying to recoup some of the lost revenue estimated at millions or billions
of Euros over the years on interest earned by their citizens in tax havens like Switzerland
and Luxembourg.
In a way the blame for this has been put on the German dentists and other
professionals. For decades they have loaded up their Mercedes with suitcases stuffed with
cash, and driven across the border to place like Luxembourg and Switzerland. There it
would be deposited without the knowledge of the German taxman. With the increasingly
public frustration and the government losing out on taxes, it was absurd with the ease that
the wealthier citizens were evading taxation. Hence the German authorities decided to blow
the whistle on this and pushed for a new directive.22
In 1989, negotiations start, which were divided for years between nations that lost
out on taxes, like France and Germany, and financial centers like Luxembourg and Britain
that profited from the investment business.23It took well over a decade for the member to
reach some sort of an agreement since it was a very political divided issue, according to
Roger Kaiser, a tax specialist at the European Banking Federation in Brussels. Eventually
they agreed to limit the aim at only the interest income for savings and bonds. Furthermore
it would only cover individuals and not companies, trusts, and earnings from other assets,
like stocks and derivatives.
No one can deny that 2001 was a decisive year for the international economic
world. With the hold Enron scandal and the 9/11 attacks, new regulations on international
economics where need and since have been implemented. Places like Switzerland were
now finding it harder to accept money without asking questions because of stricter money-
laundering rules adopted since 9/11. American companies also had new regulations to
follow after the Enron scandal, which made it less attractive to keep cash flow through OFC
nations. Hence new methods where developed in order to accommodate these regulatory
changes.24

22
Teresa Hunter, Tax Dodgers feel the heat, Scotland on Sunday, June 19, 2005
23
Tom Wright, Tax evaders keep step ahead of EU, The International Herald Tribune, May 25, 2005
24
Des Cahill, Offshore: Its place in the sun, Legal Week, October 28, 2004


 

- 21 -


 

 However these changes did not significantly effect a change in the way the OFCs
make an impact on the capital markets. In 2004 the debate was started, it was not simple
anymore to view OFCs as tax havens. It became clear that they needed to be addressed
since they clearly have a part to play in international finance. The question for the OFCs
and the rest of the financial community was how their relationship will be maintained with
the EU, as well as the rest of the world and their bodies, such as the IMF and OECD. A
solution was needed that balances regulatory affairs as well as the interests of the parties
involved.

3.2
The
dreaded
July
1st
implementation
of
the
directive


As of the beginning of 2005, banks had to develop new strategies in order to

mitigate the adverse effects of the EU’s Savings Tax Directive (STD) on their offshore
retail business. They had legitimate concern that a number of clients in light of the STD
would move their money to jurisdictions that is outside the scope of the directive to places
such as Singapore, Hong Kong and the Bahamas in order to avoid disclosing the details of
their savings income to the perspective EU member state tax authority or have it directly
deducted at the source.25 The offshore retail sector for banks is such big business that they
have a duty to the shareholders to think of ways to protect it, but this is a sensitive issue. It
is understandable that given the political sensitivity on taxes, that no bank wants to be seen
to be condoning or assisting tax evasion; nor do they wish to give away any secrets to their
competitors.26
Another fear that the European banking and investment management industry had
was that the July 1 deadline might not be met. They expressed deep concerns and an urgent
need for clarity and certainty on the implementation process of the directive. The problem
was that this late stage, most member states have been unable to provide appropriate
guidance, which they should have done by January 1, 2005. Banks and fund managers had
serious doubts about being able to deliver IT systems to process the information and state
that “in some countries there is likely to be a low quality level of implementation because

25
The exact details of the directive will be covered in Chapters 4 and 5
26
Michael Imeson, Actions to Keep Valuable Clients – The EU’s Attempts to Make Offshore Savers Pay Tax
Are Forcing Banks to Devise Some Innovative Strategies To Protect This Sizeable and Lucrative Market, The
Banker, Jan. 1, 2005


 

- 22 -


 

of the lack of guidance and lack of certainty.”27 However in Switzerland, the main ‘third
country’ involved in this directive had already published a second draft of guidelines,
which seems to help facilitate the task for the banks. Neither UBS nor Credit Suisse shared
these concerns, of course there where going to be slight differences in the interpretation of
the directive. The cost of implementing such a system was estimated at several million
Swiss francs, and hence it is understandable that the banks would want to know exactly
what was expected of them and how to do so. The biggest problem is that no-one knows the
size of the offshore market worldwide. Sterling retail deposits in the Channel Islands and
Isle of Man are estimated to be about 250 billion, a third of the total onshore UK retail
deposits.28

3.3
Directive
comes
into
Effect
July
1,
2005


While the directive is extensive in the sense that it extends beyond the borders of
the EU to countries such as Switzerland and the Channel Islands and number of other
offshore centers (See Table 1) there are already doubts of its effectiveness since it doesn’t
cover all countries and OFCs. However good the intentions might have been, the banks and
clients have been looking into the loopholes, and for legitimate reasons: The banking
industry argues that it is their obligation toward their clients and shareholders to assist in
finding the best financial instrument that yields the best income, an obligation that extends
to consultation on tax avoidance processes and methods. Experts suggested that these new
tax rules could get as much as 10 billion Euros a year for the member states. A big sum
concerning that member states have been obsessed by the EU budget and growing deficits.
But these same experts acknowledge the loopholes and say that the EU could only expect to
collect 10% at best.29 We will look more into these loopholes in chapters 4 and 5.
But as soon as the directive became effective there where already those who jumped
off board. The Government of Gibraltar published a statement that Friday, stressing that the

27
Susana Fernandez Caro, EU Savings – Nowhere to hide for EU savers – Individual Savings are soon to be
taxed without mercy and there will be no escaping it, The Banker, May 1, 2005
28
Michael Imeson, Actions to Keep Valuable Clients – The EU’s Attempts to Make Offshore Savers Pay Tax
Are Forcing Banks to Devise Some Innovative Strategies To Protect This Sizeable and Lucrative Market, The
Banker, Jan. 1, 2005
29
Flaws in the EU Savings Directive will cost member states dearly – The new Tax rules could bring in
E10bn a year but significant loopholes mean they are unlikely to achieve their aims, The Banker, July 1, 2005


 

- 23 -


 

directive was in place but that, as the UK and Gibraltar are not separate member states, the
rules do not apply between them. This means that UK residents with money in offshore
accounts in Gibraltar are unaffected by the new rules and, as it stands; their financial affairs
will not be disclosed to the HM Revenue & Customs.30 This had many OFCs, including
Guernsey who signed onto the directive in an uproar and call for a suspension of the
directive because it was no longer a level playing field. Hence Guernsey set forth July 25 as
a deadline for the issue to be resolved, otherwise they might too seek to op-out from the
directive.31 While the matter was resolved quietly as we can see that Gibraltar implement
and opted for the withholding tax, it does show that members who signed on met this
directive with resistance. One could only imagine should Gibraltar have not shaken that
others as well could have opted out on basis that the promise of a level playing field was
not upheld. Even though OFCs have adopted the directive, which are not part of the EU,
their banks where successfully trying to devise exotic products that will escape the
directive’s crackdown in order to secure and maintain their customers.32 The relationship
change will further be discussed in subsequent chapters.
While most signed on to the free movement of information exchange effective on
July 1, 2005, there were some who opted during the transitional period for the withholding
tax option, mainly the OFCs. However there were three main EU member states that also
chose the withholding tax option while allowing their bank’s clients to voluntarily opt for
the information exchange; these where Austria, Belgium, and Luxembourg. The additional
benefit was that if the client could prove that they are not liable for taxes in their home
country even the withholding tax could be foregone. Interestingly a majority of the clients
at Alliance and Leicester International33, based in the Isle of Man, opted for the information
exchange. The same trend was true at Nationwide International and at Smith & Williamson.
Simon Hall, a managing director of A&L Intl., said: “we are reassured that most people
have opted to share information, because it suggests that they have nothing to hide and are
paying tax on their interest through their tax returns, as they should.”34 Just a month later
though, the HM Revenue & Customs started to send threatening letters to hundreds of

30
Gibraltar rocks EU tax directive, Sunday Telegraph (London), July 3, 2005
31
Teresa Hunter, EU deal with offshore tax havens in disarray, Scotland on Sunday, July 3, 2005
32
Kathryn Cooper, Savers run from offshore rules, Sunday Times (London), July 10, 2005
33
Alliance and Leicester International is part of the Banco Santander, S.A
34
Kathryn Cooper, Savers run from offshore rules, Sunday Times (London), July 10, 2005


 

- 24 -


 

savers, giving them just 30 days to respond. “HM Revenue & Customs holds information
which shows that you have operated a bank account outside the UK… experience has
shown that such accounts are often associated with tax evasion… in the most serious cases
we consider criminal prosecution.”35While this letter is very aggressive and has frightened
a lot of people, ignorance of the law is no defense, however intimidation cannot be the
means to promote the public to sort their tax affairs or can it? As we saw in Chapter II,
Alligham-Sandmo model provides some explanation for this effect.
These scare tactics and measure could lead to capital flight to Asia and other parts
of the world that have not signed onto the directive.36 As we will discuss in Chapter 6, these
macroeconomic forces could have an unanticipated consequence on the European market
especially on the private banking sector. While this is predominated by multinational banks,
with high mobility, is it to the best advantage of Europe to pursue such measures?
Considering that member states are fighting hard to combat their deficits, will this potential
influx of cash really help? While jury is still out on these questions, we will take a
theoretical standpoint on these questions and elaborate further in Chapter 6.

3.4
One
year
later


Considering that most of the banks found ways to satisfy their stakeholders and
developed their products so that they are in compliance with the directive, the EU saw the
need to start negotiations with Hong Kong and Singapore as part of a renewed drive to stop
wealthy Europeans form moving their savings to offshore havens in Europe and beyond the
scope of the directive. As the EU is trying to offset billions of Euros in lost revenue
resulting from citizens moving their capital to tax shelters like Switzerland and
Luxembourg and beyond. According to Maria Assimakopoulou, spokeswomen for Laszlo
Kovacs, the EU commissioner for taxation, “Hong Kong and Singapore are important
financial centers and we have to find solutions to avoid tax evasion and create a level
playing field among offshore centers.” However, one can assume that capital fight would

35
Kathyrn Cooper, Taxman is rapped for ‘intimidating’ offshore investors, Sunday Times, August 7, 2005
36
Sonia Kolesnikov-jessop, Rising European money tide flows to Asian coffers; A new EU rule could result
in 1 trillion being shifted overseas, The International Herald Tribune, October 26, 2005


 

- 25 -


 

be the natural reaction from the wealthy individuals affected by this directive, which will be
discussed in Chapter 6.
The directive was full of loopholes, which we discuss in Chapter 4 and 5, and while
the commission has no official figures, it is estimated that German citizens alone have
managed to avoid up to 500 billion Euros, in offshore savings. In the first six months after
the implementation of the directive, those countries who have opted for the withholding tax
option have only been able to come up with a marginal amount. Based on the Herald
Tribune, Switzerland raised only 100 million, which is minimal considering the fact that is
the largest of the offshore sites for EU citizens; Luxembourg raised 4 million, Jersey 13
million, Belgium 9.7 million, Guernsey 4.5 million and Liechtenstein 2.5 million37
Cumulatively that is 132.7 million Euros, sound significant? Not really considering if we
only look at the speculated amount from Germany being 500 billion, making an
hypothetical interest of 4% and then being charged 15% on that interest, the amount due
would have been about 3.75 billion Euros. That means that only 3.5% of the speculated
amount from German avoidance was returned for the entire population of the EU. In
Chapter 5 we elaborate on this figure with official data provided for by the EU commission.
It is no wonder that the EU is driven to create a “level playing field”. In addition to Hong
Kong and Singapore, the commission was also seeking talks with Bahrain, the Bahamas,
Canada, Dubai, Macau, and Japan. As we will see in Chapter 8 current development could
give rise to the end of tax havens should the EU and OECD have their will.
Singapore at this time has seen the advantage of become a niche market for the
private banking sector and banks are responding. Due to the directive, many banks have
expanded their operation with the private banking sector in particular in Singapore. In an
interview with Daniel Truchi by Leslie Yee, he says that European clients are drawn to park
their assets in Singapore not just because of the tax-friendly environment, but also because
their confidentiality is better secured in Singapore than in Switzerland since the directive
took force. Unlike in Switzerland, banking secrecy is embedded in Singaporean banking
law, it restricted as to whom and what they can release. But he also says that the recent rise

37
Dan Bilefsky, EU looking to havens in Asia for lost taxes, The International Herald Tribune, Sept. 5, 2006


 

- 26 -


 

in private banking activity in Singapore, and aggressive practices done by the competition
could lead to the dilution of the market.38
Less than a month after the EU set forth their agenda to initiate talks with Hong
Kong, a government spokesman’s said that “ we consider that our current legal framework
governing the exchange of tax information is appropriate for Hong Kong, and we have no
intention of changing it.” He went further to say that “Our tax authority cannot, in a
response to a request from an overseas tax authority, take active steps to obtain the
requested information, unless it would also require the information for its own purposes.”
They acknowledge that there is money flowing in from Europe, and while it adds to the
momentum that Hong Kong and Singapore enjoy, they say that is it insignificant to that
momentum. It understandable that any initiative will take years to get the Asian countries
on board, considering how long it took to get this directive in the first place. One might
speculate that the Asian countries would want something in return such as better customs
quotas with the EU.39

3.5
Bank‐State
Relations


Graphic
1:
Bank
–
States
Relations

Customers
 Banks
 State


As we can see through the timeline, the main responsibility for the banks, especially
in countries that operate either as an OFC or have bank secrecy laws such as Luxemburg,
Austria and Switzerland, their main responsibility was towards their shareholders. The
banks interests throughout the better part of 20th century were protected by the state. As we
will see in chapter 4 and 5 this dynamic will undergone as significant change. Some of this
can already be see in the UBS case (Chapter 4.2) where the Swiss government threatened to

38
Leslie Yee, Private banking bubble building up in Singapore; New entrants tout bargain-basement fees to
buy market share; SG exec, The Business Times Singapore, Sept. 14, 2006
39
Daniel Hilken, Policy on exchange of tax data to stay; Official rules out changes as EU seeks talks to cut
flow of billions of euros in tax avoidance funds, South China Morning Post, Sept. 25, 2006


 

- 27 -


 

confiscate the documents that US court ordered in order to protect their bank secrecy laws,
banks and in the end the reputation of the Swiss confidential banking nature.
This relationship is further analyzed in chapter 4.3.3

3.6
Summary


In this Chapter we have provided the reader with a descriptive timeline of the events
and reactions that came up before and during the implementation of directive. The events
that have been landmarks to increasing political commitment to crackdown on tax
protestors as well as the international playing field for banks and how their relationships to
customers and governments has changed considerably during this period. While the
discussion of directive spawned before the 9/11 attacks and the Enron scandal, these factors
changed the public’s view and into agreeing that there needs to be a crack down on criminal
financing and hence further regulations that supervise OFCs. We see how measures enacted
conflicted with the banks responsibilities to their shareholders and clients. This almost led
to a complete failure of implementing the directive should one have stepped out of line and
created a situation of an “un-leveled playing field”. This was the case of a typical prisoner’s
dilemma, fortunately for the EU and the OECD the gamble worked out in their favor so far.
However there is still a long road ahead as we will see in the upcoming chapters since the
directive was full of loopholes in order to create a consensus. Banks still have a
responsibility towards their shareholders and will create new products that are in line with
the regulations but beneficial for their legitimate interests.


 

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Chapter
IV
–
The
2003
EU
Savings
Tax
Directive


Introduction


This Chapter sets out to analyze Council Directive 2003/48/EC of June 3 2003 on
taxation of savings income in the form of interest payments, otherwise known as the EU
Savings tax directive. We will look into the territorial jurisdiction of this legislation, scope,
desired aims, as well as the actual legal and economic effects that it has brought about.
Within this chapter we shall also look into how the point of view of the EU on the matter of
capital taxation for natural persons extended to the rest of the OECD countries and became
the legal state of the art in the matter of transparency of capital movement. International
case law has emerged, out of the new information exchange doctrine, and we will present
some of these cases in the second part of the chapter.

4.1
EU
Tax
Savings
Directive


4.1.1
Legal
Basis


In the preamble of the legal text of the directive the commission makes an argument
towards the legal basis of the regulatory measures as well as the legislative background
existent at the time of the drafting of the directive.
It is important to address the legal background and framework of the measures due
to the very sensitive measures that are to be regulated for the first time at a supranational
level. Matters on individual taxations have historically not been delegated to community
institutions and there was, and still is, a very strong political viewpoint to keep taxation
issues de-centralized and de-harmonized. In order for the very sensitive issue to be tackled
and regulated the commission had to prove its legitimacy in drafting legislation for the
Council to pass.
The directive is directly linked to the aim of establishing a well functioning internal
market in relation to the free movement of capital40. The measures are therefore clearly

40
Articles 56 to 60 EC Treaty


 

- 29 -


 

linked with the need to ensure a disturbance free market for capital across the EU member
states41.
Its main focus is to ensure that any disturbances caused by the avoidance of taxation
related to interest payments on savings income42 are removed. In light of these issues, the
directive acknowledges the right of member states to:
• To regulate their own affairs and ensure that proper taxation takes place,
• To set up measures that safeguard legitimate interests and prevent
infringements of national law as well as
• To distinguish between taxpayers who are not in the same situation in
regards to their place of residence or with regard to the place where their
capital is invested43.
In doing so, however, member states must not institute any measure that can
possibly be used as a means of arbitrary discrimination or disguised restriction to the free
movement of capital44.
Probably the key element in this argumentation of legal basis comes, however, in
the form of its reference to the principle of subsidiarity45 and proportionality, according to
those, ‘In the absence of any coordination of national tax systems for taxation of savings
income in the form of interest payments, particularly as far as the treatment of interest
received by non-residents is concerned, residents of MS are currently often able to avoid
any form of taxation in the member state of residence on interest the receive in another
member state’. The conclusion being that, based on the need to establish the internal free
market for capital, the lack of national legislation and the principle of subsidiarity, with
exact wording of the text mentioning that: ‘Since the objectives of this Directive cannot be
sufficiently achieved by member states, because of lack of any coordination of national
systems for the taxations of savings income, and therefore be better achieved at Community
level”46 the community institutions may adopt measures that do not go beyond what is
necessary for the achievement of the objectives.

41
Paragraphs (1) (6) and (24) of the Preamble of Council Directive 2003/48/EC
42
(6) Preamble of Council Directive 2003/48/EC
43
(3) Preamble of Council Directive 2003/48/EC
44
(4) Preamble of Council Directive 2003/48/EC
45
Article 5 EC Treaty
46
(10) Preamble of Council Directive 2003/48/EC


 

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4.1.2
Aims
and
Scope


“The ultimate aim of the directive is to enable savings income in the form of interest
payments made in one Member State to beneficial owners who are individuals resident in
another member state to be made subject to effective taxation in accordance with the laws
of the latter member state”.47
With the intention of avoiding taxation, individuals, as mentioned in the preamble,
hold savings deposits in foreign banks, in member states, other than the ones they are
resident of. This, in the view of the commission has a very disturbing effect on capital
movement and cheats member states out of very much needed taxation revenue. The
desired effects of this directive were, firstly, as mentioned in the quoted paragraph above,
to create a leveled playing field for the free movement of capital and free up competition,
Individuals, having lost the incentive to avoid taxation in their resident countries by moving
savings in another country will therefore chose to move their capital based on other,
competitive criteria within the common market.
The second effect that the directive was supposed to have was to ensure that
Member States gain access to a considerable amount of tax revenue, stemming from the
effective taxation of savings interest.
The two specific aims presented above were seriously hindered by the clear
limitation of scope that is also part of the legal text. The version of the Directive voted in
2003 clearly limited its own scope to only cover certain forms of debt claim. Thusly the
scope of the Directive expressly excludes issues relating to the taxation of pensions and
insurance benefits and certain negotiable debt securities48. Loopholes to therefore avoid the
legal effects of this legislation, which deter the aims of it, are embedded in the legal text
itself. As this paper will show these loopholes inherent in the text were extensively used
and became a focus of the Commission review of 2006 and 2009.
Relating to the scope of the directive and its geographical limits we have to make a
few comments, which are relevant to understanding the effects that it wished to have.
As any EU legislation, the legal effects are naturally limited to the Member states of
the European Community, however due to the complex web of bi-lateral agreements and

47
(8) Preamble of Council Directive 2003/48/EC
48
(13) and (22) Preamble of Council Directive 2003/48/EC


 

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parallel economic agreements with other financial centers, capital movement is possible,
with very few restrictions, to countries which are outside the EU. In order for any
agreement on effective taxation of savings income to take place the scope of the EU
directive had to be extended to those countries, which historically have been a haven for
European resident’s capital. The Directive acknowledges: “ So long as the United States of
America, Switzerland, Andorra, Liechtenstein, Monaco, San Marino and the relevant
dependent territories or associated territories do not all apply measures equivalent to, or
the same as, those provided for by this Directive, capital flight towards these countries and
territories could imperil the attainment of it’s objectives. Therefore it is necessary for the
Directive to apply from the same date as that on which all these countries and territories
apply such measures.”49 This novel approach to Community legislation is paramount for
the attainment of the objectives laid down. It has also been the reason for the very long
process of negotiating. Council Directive 2003/48/EC had been open for negotiations for 14
years before it came into effect. This is due largely to the fact that of independent states like
Switzerland, Andorra, Liechtenstein and San Marino which base a lot of their revenue and
reputations on being financials centres with loose taxation regimes, had to give their
consent to apply equivalent measures. As will be discussed later on, this process was under
very heavy attack on the basis of structural differences in national legislation, particularly
in regards to banking secrecy laws present in some of these countries.
Dependent and associated territories, which are not bound by EU law, but are
subordinated to EU member states, such as the Isle of Man, the Cayman Islands, Aruba,
Gibraltar have been bullied into acceptance by the UK and the Netherlands respectively.

4.1.3
Contents
of
the
Directive


Articles 2-6 of the Directive are dedicated to defining notions like Beneficial owner,
Paying agent, interest payment and competent authority, these articles provide a specific
insight as to whom this directive is addressed and what exactly it regulates.
A beneficial owner will be ‘any individual who receives an interest payment or any
individual for whom an interest payment is secured’50. This definition seems broad,
however it is clearly limited to natural persons, therefore, nothing in the directive can be

49
(24) Preamble of Council Directive 2003/48/EC
50
Article 2 ‘Definition of Beneficial owner Council Directive 2003/48/EC


 

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used to regulate interest paid to any legal entities. Further on, the directive clears up the
issue of residency, and mentions that ‘Residence shall be considered to be in the country
where the beneficial owner has his permanent address’ or ‘by means of a tax residence
certificate issued by the competent authority of the third country that the individual claims
to be resident’.51
Article 4 defines the paying agent as ‘Any economic operator who pays interest to
or secures the payment of interest for the immediate benefit of the beneficial owner.’
Further on, after defining these notions it goes into the specific requirements that
the categories of subjects are bound to follow.
In studying the substantive provisions of the Tax savings Directive of 2003 we find
that central to the legal problem is the concept of ‘Automatic information exchange’.
According to this two step doctrine, paying agents are required by law to hand over to the
competent tax authorities of their country of business information regarding the identity
and residence of the beneficial owner, his account number and interest payment52. Once the
national competent tax authority has this information it will, at least once a year
communicate all relevant information to tax authorities of the beneficial owners state of
residence53. This Doctrine is not novel to the EU, it has been developed with the OECD
and is based on the OECD Model agreement on exchange of information on tax matters
released on April 18th, 2002. The parallel application of the OECD model with non-EU
countries and the EU tax directive in MS and associated territories have made it possible
for the legislation to take effect. Without such coordination of policies, capital flight would
have been possible and very likely to non-signatories of these agreements.

4.1.4
Transitional
provisions


EU Member states like Belgium, Luxembourg and Austria, as well as the Swiss
Confederation and other non-EU states where this directive was to take effect have had
very strict national legislation that protects and supports bank client’s confidentiality. The
automatic exchange regime is at its core conflicting with these countries national law. In
the EU, the issue with national law conflicting with EU law has been addressed for a very

51
Article 3, Paragraph 3 and 3(b) Council Directive 2003/48/EC
52
Article 8,’ Information reporting by the paying agent’ Council Directive 2003/48/EC
53
Article 9 ‘ Automatic exchange of information’ Council Directive 2003/48/EC


 

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long time and clearly embedded within the principle of supremacy, however due to the
special circumstances of this particular legislation and it’s need to be applied on a much
wider geographical scope than other EU acts this principle could not apply.
The very strong negotiation power of the Swiss Confederation has made it possible
to refuse the application of the Automatic information exchange regime, and with the
precedent created more nations have taken the same position and arguments. Based on the
similarity with the Swiss Federation on national banking secrecy laws, Austria,
Luxembourg and Belgium have refused to adopt the information exchange. And with them
so did the other non-EU countries, and dependent territories. In order for the aims and
objectives the commission laid down to take effect a different approach had to be taken.
In order to get the Swiss confederation on board, a withholding tax regime was
created, to function in parallel with information exchange. In practice, instead of
automatically giving out information to competent authorities, paying agents were to levy a
withholding tax, which was initially fixed at 15% for 2005-2008, 20% from 2008 to 2011
and 35%54 after that. The revenue generated by this means was to be transferred
anonymously to the competent authority of the member state where the paying agent was
resident with information only regarding the state of residence of the beneficial owner
without mention of his identity. 75% of this revenue was to be transferred to the state of
residence and 25% to be kept55. Due to the addition of this tax, as a result of banking
secrecy laws in Switzerland, Austria, Belgium and Luxembourg, many other jurisdictions
have chosen to step out of the Information exchange regime and apply the tax as can be
seen in Table 1 and further explained in Annex 1.
The withholding tax is, a tax imposed on individuals by a community act, it’s legal
basis is under scrutiny whether or not it follows the precise wording of Article 5 (EC) and
the principle of subsidiarity, as mentioned in this paper, the imposing of taxes is a sole
competency of member states, however, the EU has successfully introduced a form of tax
by means of its own legislation. In order to limit the scope of this tax, the directive
introduced an article in the Directive that allows any individual, subject to this tax to avoid
it, provided that he voluntarily accepts to share private information as presented in the

54
Article 11(1) Council Directive 2003/48/EC
55
(19) Preamble of Council Directive 2003/48/EC, Article 12(1) and (2) Council Directive 2003/48/EC


 

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information exchange regime regarding his savings paid by paying agents resident in
countries applying the withholding tax regimes.56

TABLE
1:
JURISDICTIONS
AFFECTED
BY
STD
(see
Annex
1)

The transitional period will end when the last of ‘ Switzerland, Liechtenstein, San
Marino, Monaco, and Andorra will apply the OECD model on exchange of information and
when the Council will decide by unanimity that USA is applying the exchange of
information regime as drawn up in the OECD model agreement.57
The same time that the transitional period will end will be the time that Austria,
Belgium and Luxembourg will have to stop levying the withholding tax and switch to the
automatic information regime58, effectively ending the history of banking secrecy in those
countries. It is hard however to imagine how unanimity in the council will be reached when
the consequences of that will be undesirable by some of the voters.

56
Article 13 Council Directive 2003/48/EC
57
Article 10(2) Council Directive 2003/48/EC
58
Article 10(3) Council Directive 2003/48/EC


 

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4.1.5
Transposition


It is very interesting to look into the approach of the council and commission into
the decision of transposition of the directive within Member States, this approach is very
novel and we may see it again on matters, which will require other non-member states to
apply similar or equivalent measures to EU legislation.
The first step of the transposition procedure requires member states to adopt and
publish laws, regulations and administrative provisions necessary to comply with the
directive and apply such provisions from a set date ofJuly1st, 2005.59
However this date will not be used if, by that time, the council has not agreed by
unanimity that two conditions have been met: That the following sovereign states: Swiss
Confederation, Principality of Liechtenstein, Principality of Monaco and Principality of
Andorra have applied equivalent measures to the directive60 and that all agreements and
other arrangements are in place which provide that all the relevant dependent or associated
territories apply from the same date information exchange systems or follow the
requirements of the transitional period, as laid down in Articles 10, 11, and 12.61
It is very interesting to mention that as required by the aims of the directive, and the
articles cited above, all dependent and associated territories were supposed, at the date of
the entry into force of the Directive apply the same measures as provided in the Directive,
however, in practice, the Caribbean state of Bermuda was ‘left out’ of the agreement, and
for a number of years was outside the territorial scope of the Directive, effects of which
will be discussed later in this paper.

4.2.
Critique


From its early conception there were a number of drawbacks and mistakes inherent
in the legislation. As specified in the Directive itself, the legislation was subject to review
by the commission every 3 years in order to assess the impact and its ability to reach the
goals and aims it set out to achieve. In doing so, we believe that the authors of the initial
Directive were skeptical as to the effectiveness of the legislative measures, and rather

59
Article 17 (1)(2) Council Directive 2003/48/EC
60
Article 17 (2) (i) Council Directive 2003/48/EC
61
Article 17 (2) (ii) Council Directive 2003/48/EC


 

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pushed for its adoption in order to ensure a playing field for more in-depth tax coordination
policies at an international level, this directive was used in order to break the ice in a very
sensitive field of taxation, and pave the way for deeper cooperation and possibly future
harmonization. The commission report of September 15th, 200562 presented a number of
issues that presented large problems to the attainment of the goals. We shall look into those
issues more in Chapter 5.

4.2.1
Effects


‘The Directive aims at enabling taxation of foreign interest payments received by

individuals in accordance with the rules of their State of Residence. The data suggest that
the Directive, which is based on automatic exchange of information, has not led to major
shifts in international savings’. 63 The reasons for this very surprising result are mentioned
to be the inherent loopholes of the Directive, the fact that the main sources of deposits
(Switzerland and Luxembourg) did not apply the information exchange regime and have
applied a relatively low withholding tax of 15% on the reviewed period but also
acknowledges lack of data and shortcomings in the legal definitions which may alter the
results of the data analysis.
The conclusions of the commission’s official review, as well as of the commissions
working papers are in agreement that the Directive has fallen far short of its ambitious aim.
Below we will look into the precise causes that have led to this failure.


4.2.2
Loopholes
present
in
the
Directive64


a) Geographical scope of the Directive

This issue is evident to any competent person, who makes an analysis of the legal
effects of the Directive, it was very easy to foretell at the time of conception, but due to
political reasons, extremely difficult to avoid, and just as hard to remedy. The initiators of
the Directive were very successful at greatly enlarging the normal scope of EU legislation,
as mentioned in the directive and earlier in this chapter, in order for the aims to be
achieved, the directive must be applied in EU member states as well as in a number of other

62
COM/2008/552
63
Abstract of Commission Paper ‘Tax coordination in Europe: Assessing the first three years of the EU-
Savings tax Directive, Thomas Hemmelgarn and Gaetan Nicodeme
64
As identified by Jimenez (2006), Glaser (2007) and Glaser and Halla (2008)


 

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jurisdictions. Although wide at first glance, the geographical scope included: the EU, five
third countries (Andorra, Liechtenstein, Monaco, San Marino and Switzerland) and 10
dependent and associated territories (Aruba, Anguilla, Guernsey, Jersey, the Isle of Man,
Cayman Islands, British Virgin Islands, Netherland Antilles, Montserrat, Turks and Caicos
Islands). This however, was not enough. As mentioned in the commission papers,
jurisdictions not included in the scope, such as Honk Kong, Dubai, Panama, Singapore and
Macao are very easily accessible by any individuals who seek to avoid the legal
implications of the directive as seen in Chapter 3. The use of financial intermediaries that
reside in these countries is quite common. This issue is difficult to remedy and requires the
political consent of these jurisdictions. We have yet to collect data on any negotiations
underway that could include these countries in a similar information exchange regime as
laid down by the directive.
b) The beneficial owner
As defined in the directive, the beneficial owner is ‘any individual who receives an
interest payment or any individual for whom an interest payment is secured’, this will have
as an immediate result that any companies or other legal persons such as discretionary
trusts can act as interposed intermediaries in order to circumvent the Directive
c) Definition of Interest income
Interest is defined in the Directive more broadly than the OECD definition, by the
addition of three other possible forms of interest65 however this still left out other forms of
savings such as innovative financial with capital protection and life insurance products.
The commission official review, as well as the taxation paper prepared by
Hemmelgarn and Nicodeme proposes a number of amendments to the original directive, the
exact results of which will be discussed in Chapter 5. This section was dedicated to
introducing the reader with the exact wording, legislation and effects of the initial Savings
tax directive along with the means of which it can be circumvented.
Data and Tables, which have led to the conclusions of section 4.2.1, will be annexed
to this paper.

65
Article 6 (1) (a) (b) (c) and (d) Council Directive 2003/48/EC


 

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4.3
The
concept
of
Information
exchange


This chapter so far has focused on the precise and exact legal effects of legislation
passed by the EU in order to effectively tax capital held abroad and minimize the amounts
currently outside of the ‘tax man’ of Member states. The issue of capital taxation extends
the jurisdiction of the 27 Member States, negotiations on the ways to tax offshore capital,
which started in 1989 have sparked an international consensus amongst OECD Countries
and G20 countries.
The EU approach to tackle tax havens is by using the automatic information
exchange regime, it allows the competent tax authorities of member states to know exactly
how much residents of their country earn and tax them accordingly. This approach was
codified and put into the legal and administrative systems of EU countries thanks to the
novel approach of the Savings Tax Directive, however this did not limit the effects of the
information exchange doctrine to the EU. This doctrine has extended geographically to
cover legal disputes involving third countries as well as extended in legal scope to cover
more than just interest on savings. The direct application of equivalent measures extends to
the other European states that historically have been known to be tax havens, dependent
and associated territories and Switzerland. Indirectly however, the directive’s new
understanding of information exchange may have had an impact on the US, an impact
explained more in depth is chapter 5 under case law.
The USA’s court case against UBS, and it’s off-court government negotiated
settlement offers great insight into the international development of the information
exchange regime. In the following section we will look into how this case, as well as other
UBS related cases developed in very recent years.

4.4
Summary


This chapter of our paper is at the center of the discussion regarding the legal and
economic regulatory framework currently under development on the taxation of natural
persons.
We have looked into the reasons behind the automatic information exchange regime
envisioned by the EU and carried out with the help of the OECD and how, exactly it took


 

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form: with its maximum scope and force within the EU, and with some spillover effect on
other jurisdictions around the world. It is our educated guess that this doctrine will extend
further, with time, to apply to other financial centers in Asia and the Middle East.
The Council Directive 2003/48/EC, otherwise known as the Savings Tax Directive
has been at the forefront of tax coordination policies on the taxation of capital and natural
persons, it has paved the way for future cooperation among governments and has positioned
itself as a landmark law against the importance of Tax Havens. Even though it’s effects
have clearly been very limited, and this directive has fallen far short of its goals the
importance of it cannot be underestimated in regards to future developments on the matter
of capital taxation and banking secrecy. The negotiations leading up to its adoption have
paved the way for an international consensus of the large economic powers to slowly
combat tax havens, banking secrecy and tax evasion. Empirical evidence in the form of
Court cases against UBS and out of court settlements between the Swiss, French, British
and German governments stand evidence of the extension of the Information exchange
doctrine in the detriment of Banking secrecy. A balance has yet to show itself and we may
see more concessions coming in the near future.


 

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Chapter
V
–
Review
and
Possible
Improvements
to
the
Directive


Introduction


This Chapter sets out to analyze the Report from the Commission to the Council of
September 15th, 2008 in accordance with Article 18 of Council Directive 2003/48/EC. We
will take notice of the recent developments brought on by the critiques of the initial Savings
Directive and analyze the planned changes to the issues, based on the Council’s review of
the results and the heavily criticized loopholes present in the current legislation.

5.1
Outcome
for
the
first
three
years


Article 18 of Council Directive 2003/48/EC states “The Commission shall report to

the Council every three years on the operation of this Directive. On the basis of these
reports the Commission shall, where appropriate, propose to the Council any amendments
to the Directive that prove necessary in order better to ensure effective taxation of savings
income and to remove undesirable distortions of competition.” The first report draws on
consultations held with the Member State’s tax administrations, data provided by them on
the first two tax years of the application, and findings from a group of industry experts set
up by the Commission in 2007.
The directive was implemented without any major incidences on the effective dates
throughout the member states (Bulgaria and Romanian, Jan. 1st, 2007). So far the
Commission has only opened two infringement procedures concerning the implementation
of the Directive. A formal letter of notice was sent to the member states involved,
requesting them to submit their objections. “One case relates to the incomplete
transposition of Art. 4(3), allowing entities which are paying agents under Art. 4(2) to opt
to be treated as a UCITS66 for the purpose of the Directive. The other concerns the non-
application of the Directive where the beneficial owner has “non-domiciled” states.”67 [See

66
Undertakings for collective investment in transferable securities authorized in accordance with Directive
85/611/EEC
67
Report from the Commission to the Council, COM (2008) 522 final, September 15, 2008, pg 2


 

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section 5.3 Existing Case Law] The report further on goes to say that all exchanges in 2006
and 2007 took place on time and without technical problems, however in the first year, the
member states reported some difficulties in identifying taxpayers, due to the lack of
information on the tax identification number (TIN) or date/place of birth.

5.2
Economic
Data


As we discussed in the previous chapters data on this sector is difficult to obtain,

even this report acknowledges this fact. Since it is a new task for many countries to collect
and report data on this issue that might explain why values are missing especially on
information exchange. Furthermore the definition of data treatment has not been agreed on
yet either, hence these factors restrict the basis of the analysis. Not surprisingly though the
largest economies exchanging information reported the highest values in accordance with
Art. 8 and Art. 968. United Kingdom reported 9.1 billion EUR for payments made from 1st
of July 2005 to 5th of April 2006 (end of tax year). The majority of the revenue from the
application of the withholding tax in 2005 and 2006 was raised in Switzerland and
Luxembourg, which accounted for more than 45% and 22% respectively of the total
revenue. The largest beneficiaries of this were Germany with 192.7 million EUR and Italy
with 112.9 million EUR. Belgium had a special relationship with Luxembourg, receiving
more than 71 million Euros, 74% of that directly from Luxembourg.69

68
Council Directive 2003/48/EC
69
Report from the Commission to the Council, COM (2008) 522 final, September 15, 2008, pg 3


 

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 Montserat n.a. n.a.
Table
1:
Interest
payments
and
sales
proceeds
reported
by
countries
using
 in million Euro
*70
Information
exchange 


EU Member States 2nd half 2005 2006 Table
2:
Tax
revenue
shared
by
countries
with
withholding
tax
regime


Cyprus n.a. n.a.
Czech Republic n.a. 17.81 EU Member States 2nd half 2005 2006
Germany 660.73 1392.06 Austria 9.48 44.32
Denmark n.a. 1.16
Estonia n.a. 4.40 Belgium 7.51 25.92
Spain n.a. n.a. Luxembourg 35.90 124.59
Finland n.a. 7.19
France 568.14 1512.54 Third Countries
Greece 6.85 23.11 Andorra 3.50 12.77
Hungary n.a. n.a.
Ireland 258.87 770.72 Liechtenstein 1.94 7.08
Italy n.a. n.a. Monaco 3.75 11.70
Lithuania n.a. 0.09
Lativa 0.18 0.65 San Marino 1.13 7.47
Malta 1.02 2.10 Switzerland 77.23 255.91
Netherlands n.a. 795.69
Dependent and Associated Territories
Poland 0.07 0.61
Portugal n.a. 0.56 British Virgin Islands 0.00 n.a.
Sweden n.a. n.a.
Turks and Caicos 0.01 0.02
Slovenia n.a. 1.35
Slovakia 1.87 4.76 Guernsey 4.93 16.83
United Kingdom 9132.49 n.a.
Jersey 13.26 32.15
Dependent and Associated Territories
Anguilla n.a. n.a. Isle of Man 13.26 20.35
Aruba 0.01 0.09
Netherlands Antilles n.a. n.a.
Cayman Islands 8.81 18.02
in million Euro

70 *
Amount of interest payments and sales proceeds under Art. 9 subject to
exchange of information voluntary disclosure. (Beneficial owners and
residual entities)
Source for both tables is the presentation by the Report to the Commission
 The report also relies on data provided for by the Bank for International Settlements
(BIS), which provides non-public available data on bilateral cross-border loans and deposits
for its reporting countries during the period of 2000-2007, only Singapore and Macao
refused to disclose their data. The report states, “the share of withholding tax countries as a
% of total deposits has decreased from 35% to 29.3% between mid 2003 and mid 2005, but
stabilized after the introduction of the directive. Countries that exchange information have a
larger bank to non-bank71 deposit ratio and their share of non-bank deposits has slightly
decreased, albeit this occurred before the Directive came into force.”72 The question
remains; why did the level of deposits decrease prior to the implementation of the directive
and where did the money go? [We will discuss this further in chapter 6.]
According the findings from the report based on numbers from EUROSTAT, the
analysis does not show any significant change following the implementation of the
directive. “The share of interest received by households in the total interest received by
individual and corporate recipients has decreased but this is mainly due to an increase in
financial corporations’ receipts.”73 This should not be a surprise that individuals set up
financial corporations since they are outside of the jurisdiction of this directive, plainly said
the directive missed that.
The final figures that the report relies on is on the available data on UCITS and non-
UCITS74 provided by the European Fund and Asset Management Association, which shows
that their share remained constant at 78% and 22% respectively. This data is based on
figures from 2002-2007. The only noticeable change was a gradual decrease of UCITS
investing in bonds but into equity.
While the report claims that this phenomenon was present prior to the introduction
of the directive, it is due to the diligence of the individuals as well as that of the banks, that
they have taken pre-emptive measures to counter this directive as can be seen in Chapter 3.
It can be assumed that once the implementation of the OECD information exchange applies
as said in Chapter 8 that these figures and judgments will change. However as long as there

71
Here “bank” refers to deposits by banks and “non-bank” to deposits by others including individuals and
companies.
72
Report from the Commission to the Council, COM (2008) 522 final, September 15, 2008, pg 3
73
Report from the Commission to the Council, COM (2008) 522 final, September 15, 2008, pg 3
74
Undertakings for collective investment in transferable securities not authorized in accordance with
Directive 85/611/EEC
is no standardized method of reporting the data difficulties will remain. It is foreseeable
that the beneficiaries will in the future not be individual but financial corporations that
circumvent these legislations. We will now look at some of the recommendations that the
report has made in order to improve the future scope of this directive. It can be said that for
the most part the directive had an indirect, non-measurable, positive effect in increasing
compliance of the taxpayers’, which goes with the model proposed by Alligham-Sandmo
(Chapter II) and the risk of punishment in either the form of the withholding tax or
communication from the local tax authority (Chapter 3). The Commission advocates certain
amendments to address the following issues:
• Beneficial Ownership
• Definition of paying agent
• Treatment of financial instruments equivalent to those already explicitly covered
• Procedural aspects
We will discuss and analyze each option.

5.2.1Beneficial
ownership


As stated in Article 1 and 2 of the Directive, it deals only with the interest payments
made for the immediate benefit of individuals and not with payment to legal entities and
arrangements.75 Hence, as stated before, an individual who is a resident in the EU could
circumvent the Directive by using a legal person or arrangement. While an indiscriminate
extension of the directive to cover all payments of interest made, also to legal entities and
arrangements, would not be an appropriate solution.
The Commission goes to suggest a “look-though” approach where the banks or
paying agent would look at the information available to them about the actual beneficiary
similar to that what is stated in Article 2(2) “for payments made to individuals who are
known not to be the actual beneficial owner.” In addition banks or paying agents would use
indicators such as the “customer due diligence” measures that financial institutions and
professionals within the EU are already obliged to apply in the fight against money

75
Article 1 and 2 Council Directive 2003/48/EC


 

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laundering.76 Hence the banks or paying agents could identify who the end beneficiary is
and determine where this directive applies.
These measures will not guarantee a 100% success rate in identifying the beneficial
owner since economic operators established in the EU make interest payments to other
economic operators also established in the EU and therefore falling with the definition of a
“paying agent.” Therefore a clarification of “paying agent” is necessary and mere “look-
through approach” based on “customer due diligence” is not enough. Since financial
institutions these days are global, this definition could assist the possible misuse of the
international network to circumvent the directive.
The issue is that this could possibly violate data protection laws and violate the
privacy laws of the individuals. Private financial institutions are not a policing mechanism
foremost. Sure there is a duty to report suspicious transfers, however the banks do have a
responsibility to their shareholders and as long as there is no global level playing field, it
could significantly destroy their competitive advantage or just cause relocation to a
jurisdiction where this does not apply. As we saw in Chapter 3, banks have already opened
branches in Singapore for their private banking sector. Finally if an individual is not
involved in tax evasion, but rather just in avoidance, he/she is within his rights to do so.
This could lead to a point where the actions of the HM Revenues and Customs where not
just an isolated incidence.

5.2.2
Definition
of
paying
agent


Article 4(1) describes a broad concept of the “economic operator who pays interest
to or secures the payment of interest for the immediate benefit of the beneficial owner”,
which is well understood, however, what about the responsibility of these agents for
payments to parties outside the EU as in the case of international financial firms? Another
concept of “paying agent upon receipt”, Article 4(2-5), which describes investment and
pension funds, is causing costs for the EU economic operators and has not produced all the
results expected by the member states. Notably banks call for this concept to be abandoned.
The Commission argues that without alternative mechanisms covering payments to
intermediate structures within the EU could encourage individual beneficial owners to

76
Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention
of the use of the financial system for the purpose of money laundering and terrorist financing


 

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make extensive use of such structures to circumvent the Directive. The “paying agent upon
receipt” concept is not consistently implemented hence it leaves room for abuse and
distortions, which make cases for tax evasion. “Investment funds regulated at EU level,
whose income is taken into account for the purposes of the Directive, Article 6, could face
unfair competition from other intermediate investment structure, ‘de facto’ excluding from
the main definition of paying agent in Article 4(1) since payments made by them, even if
generated by investment in debt claims, do not legally qualify as interest payment.”77We
will look into this further in chapter 8 but it is interesting to note that the Commission does
realize that its tying the hands of their investment banking sector especially on products that
have not matured should the directive also apply to “paying agents upon receipt” concept; it
is not surprising that banks call for this concept to be abandoned. However, rather than
abandoning this concept, the Commission would suggest to clarify the application of this
concept, where the main focus is on the upstream economic operator paying interest to the
entities concerned. This approach is based on the “positive” definition of the intermediate
structures to be charged with the obligations of a “paying agent upon receipt”.

5.2.3
Treatment
of
financial
instruments
equivalent
to
those
already
explicitly
covered


The manner in which the Commission suggests to approach this is to “make clear
that these intermediate structures must apply the provisions of the Directive insofar as any
of their beneficial owners is an individual who is resident in another EU MS. This would
happen upon receipt by these structures of any interest payment as defined in Art. 6, from
any upstream economic operator, not only those established in other MS (Art. 4(2), last
sentence) or in the same MS (Art. 4(4)), but also those outside the EU. This would improve
the effectiveness of the Directive and better safeguard fair competition between upstream
economic operators within and outside the EU.”78 One can certainly see the problem is
this; without full international cooperation it will be very difficult to be effective and secure
a level playing field.
In order to have this work it would need to be based on substantial elements rather
than on legal form. This means that it wouldn't matter which legal form a person is using to
circumvent the directive but rather to look at who the end beneficiary is. The problem that

77
Report from the Commission to the Council, COM (2008) 522 final, September 15, 2008, pg 5
78
Report from the Commission to the Council, COM (2008) 522 final, September 15, 2008, pg 6


 

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arises is someone needs to decide who the beneficiary is. It can become very difficult to
gain the transparency needed to see who is earning at the end through some of the various
innovative financial methods some persons are using; ie through various dummy
corporations and trusts. The other solutions would be to include all types of entities and
arrangements which are not taxed on their income, including those covered by Article 6,
under the general rules for direct taxation and who’s main center of administration falls
within the EU should be considered to be a resident. Once again the exceptions from the
report allow for investment funds (Art. 6), pension funds and assets related to life insurance
contracts, and entities and arrangements set up exclusively for charitable purposes. In a way
the report is giving room for abuse once again, since the conflict of interest from the banks
point of view, will create products that are in compliance and taking advantage of the
exceptions. Fine, an individual will not be as easily able to set up a financial intermediary
since the end beneficiary will be the determining factor whether the directive applies or not,
however only when it is set up within the jurisdiction of the EU and the directive.
The final suggestion on this topic from the report is to create a “positive’ list covering
the categories of entities and arrangement to be considered as “paying agents upon receipt”.
It goes further to say that the” member states should take the necessary measures to ensure
that all such entities and arrangements comply with their obligations, regardless of whether
they are included in the positive list and of the information actually received from foreign
upstream economic operators’.79 But one can assume that this will be limiting the market, at
the very least distorting it, since economic operators who are not on the list would find
themselves at a disadvantage or maybe even restricted from the market.
In general “paying agent upon receipt” cannot and will not work. The banks are right,
especially with an international product line, global mobility and difficulties on the
information exchange. What if one falls within the category only during part of the phase
while the investment is maturing. Let’s say for example, a person lives within the EU for a
period of 5 years, but the remain period of the investment was outside the EU. Fifteen years
later after the product matured, he decides to move back, should he be held accountable for
the entire period of the investment? What about the market changes, should the fund have
made a loss, can he claim tax relief? This scheme provides more difficulties and handicaps

79
Report from the Commission to the Council, COM (2008) 522 final, September 15, 2008, pg 6


 

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the domestic investment, pension and life insurance markets. While they are considered to
be the exceptions, it would not be too far to presume that banks would just create products
that conform and hence are in compliance with the new direction. In the end this would just
cause the domestic European market to become less competitive.

5.2.4
Procedural
aspects


The report states the need to find a definition that covers all securities that are
equivalent to debt claims so as to ensure the effectiveness of the Directive in a changing
environment and to preventing market distortion. In regards to undertakings for collective
investment established in the EU (see Chapter 2 UCITS), Article 6 of the Directive in
current form explicitly covers these incomes. However others authorized under national
regimes of the member states known as, “non-UCITS,” are not fully covered by the current
directive. “Their treatment varies between non-UCITS with legal personality (incorporated
funds) and those non-UCITS that lack legal personality (unincorporated or “contractual”
funds and trusts, etc).”80 Only the unincorporated non-UCITS are covered by the directive
as “paying agent upon receipt.” (Article 4 (2)) Hence there is a distortion in the market.
However, it unclear whether UCITS outside the EU territory, are covered; a possible
amendment would be to include the OECD definition of “collective investment fund or
scheme” which would minimize the risk of circumvention.
Some member states have called for a more radical extension of the scope of the
directive to any kind of investment income, but those views are not popular. They wish to
include payments of dividends and on capital gains from speculative financial instruments.
These however would not be a suitable within the current framework of the directive,
which aims at improving cooperation amongst tax authorities.
Other areas that the directive would need improvements on would relate to Article 3
– the identification of beneficial owners, Article 6 – some procedural elements of the
definition of interest payments, Article 8 – information reporting by the paying agent,
Article 13 – exceptions to the withholding tax procedure, and Article 18 – concerning
statistics from member states. These refinements would all be suitable and needed. Just
briefly: Art. 3, the refinement calls for regular updates on the information on the permanent
address of the beneficial owner for establishing residency. Art. 6 calls for the home country
80
Report from the Commission to the Council, COM (2008) 522 final, September 15, 2008, pg 7


 

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rule to apply to UCITS outside of the EU. Art. 8, concerns itself about the uncertainties of
how to treat joint accounts or shared beneficiaries, and how the directive should apply in
those cases in order to avoid double taxation. Art. 13, concerns itself with the application of
the withholding tax to EU citizen who reside outside the EU, since currently the burden is
on the citizen and that should transfer to the tax authority of the state where the paying
agent operates out of. finally, Art. 18 could be changed to obligate member states to share
between themselves and the Commission in a timely manner some key statistics. As we
could see in table 1 there were several cases of the where the information was
unavailable.81

5.3
Existing
Case
law


Our research on case law based on the savings tax directive, Council Directive
2003/48/EC has yielded few results. We have concluded that the small amount of litigation
on this matter has a wide array of reasons, in this subchapter we will point out some of the
reasons for this litigation gap and look into the one case that could, in the future, shed some
light on the ECJ’s approach on taxation matters.

5.3.1
Commission
VS
Luxembourg


Council Directive 2003/48/EC, otherwise known as the STD, has been at the
headline of many economic publications, tax experts reports and political discussions,
however there has been no case in front of any court that is supported by this legislation.
Luxembourg is now part of an article 226 infringement procedure and is being referred to
the ECJ for the incorrect application of the STD, The Commission’s report82 can help us
understand what its view on the subject matter is, however the court has yet to take the case
in, and therefore the outcome is unknown.
The infringement procedure against Luxembourg began in November 2008 with the
issue of the first reasoned opinion83 adopted by the commission on the incorrect application
of the STD. According to this report, Luxembourg cannot provide an exception from the

81
Report from the Commission to the Council, COM (2008) 522 final, September 15, 2008, pg 8-9
82
‘Direct taxation: The European Commission refers Luxembourg to the European Court of Justice over its
incorrect application of the Savings Tax Directive’ IP/09/1013, Brussels 25’th June 2009
83
‘Direct taxation: Commission takes steps against Luxembourg as regards the application of the Savings Tax
Directive‘ IP/08/1815, Brussels 27’th November 2008


 

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withholding tax in any situations others than those expressly provided by article 13 of the
Directive84, however Luxembourg provides an extra exemption to the withholding tax to
beneficial owners who benefit from the ‘non-domiciled’ resident status in their country of
residence which is granted my some Member states to residents who are generally exempt
from income tax in their state of residence. The Commission goes further and mentions that
article 3(3) provides sufficient explanation on the minimum standards that a paying agent
must use in order to establish the residence of the beneficial owner and that any
implementation of the Directive should be done in accordance with these standards.
The commission believes that the implementation of the STD in Luxembourg has
been done incorrectly, and is incompatible with articles 2, 3, 10 and 11.
This reasoned opinion is been reiterated in the second step of the infringement
procedure, and in June 2009 the commission, based on the exact argumentation of the
reasoned opinion and adding the fact that Luxembourg has not amended any of it’s national
tax rules in order to comply with the STD, referred Luxembourg to the European Court of
Justice.
There has been no decision on this case yet, and our research has not found any
opinions of the advocate general that would help us look into the possible outcomes of the
case, however, judging that Luxembourg is the only member state who’s transposition of
the directive provides for the extra exception to the withholding tax thusly creating a
unleveled playing field in the banking industry and potentially harming the free movement
of capital, we believe that the ECJ will support the commission’s findings and force
Luxembourg to correctly apply the provisions of the STD.

5.3.2
Litigation
gap
in
Europe


The absence of litigation in this field may be due to a mix of a number of factors,
which will be detailed and explained below:
1. We believe that one of the most probable reasons for the lack of case law is the
limited impact that this legislation has had on the actual marketplace. The desired effects of
the STD has been negated by the large loopholes that were presented in chapter 4,

84
‘Voluntary Disclosure’ procedure, which allows the beneficial owners to authorize the paying agents to
disclose their personal information to the tax authorities and the ‘certificate procedure’ which ensures that
withholding tax is not levied when the beneficial owner presents to his paying agent a certificate drawn up by
his Member state for tax purposes


 

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therefore, the market was easily able to escape the application of the measures provided for
in the Directive and thusly the incentive to contest it has been minimal.
2. The Directive has been correctly implemented by the Member States, only
Luxembourg has been targeted by the commission to revise its national rules, the others
have transposed the act correctly. This is mostly due to the pre-adoption process and
widespread agreement that led to the consensus in the council. The countries that had raised
objections to the information exchange doctrine: Austria, Luxembourg and Belgium
applied the withholding tax, which ensures the protection of the Banking secrecy laws in
their countries, a compromise which allowed for the smooth transposition.
3. The practical application of the measures provided for in the directive is mostly
done by the paying agents, banks and financial institutions; this is a highly regulated and
financially responsible market. It’s compliance with national laws is paramount to their
strategic goals, it has been very important for banks to avoid their implication in lawsuits
and litigation, especially in the midst of the economic crisis. The potential image losses
would have surpassed the loss of business due to the application of the Directive.
4. Paying agents, banks and financial institutions, on the other hand have been
actively involved in helping their customers avoid the effects of the directive85, acting in
the best interest of their clients the very institutions called to apply the directive have been
the active players that advised clients to use existing loopholes and create intermediary
organizations, legal persons or trust funds. The banks retain the customers, the directive is
legally applied and lawsuits are avoided.

5.3.3
USA
vs
UBS


Faced with a very expensive criminal lawsuit brought against it in Miami, the Swiss
Banking giant UBS was caught between two very different law systems: On the one hand,
it’s operations in the USA have aided a very large number of clients to dodge and evade
taxes, and based on US laws it had to uncover documents that assist US authorities on
pinpoint these tax evaders. On the other hand, under Swiss Legislation, accidently
forgetting to put taxable income in your tax statement is not a criminal offence, and further
more any banking operation is done under strict banking secrecy laws, and clients of banks
that function under Swiss law enjoy wide confidentiality.
85
Michaels Imeson, The Banker, 1’st January 2005; The Banker, July 1st 2005


 

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 In a remarkable cascade of events, the doctrine of information exchange, has helped
reach a settlement in this very sensitive case against UBS, facing huge pressure caused by
the economic crisis and image deterioration caused by the lawsuit.
Thanks to the new OECD agreement model that the Swiss Government was bullied
into signing with at least 12 countries86 in order to be moved off the gray list of non-
cooperative countries on tax matters, Swiss Banking institution may no longer rely on the
Switzerland’s distinction between tax avoidance or evasion, a Swiss administrative offence,
and tax fraud, which brings criminal charges, to avoid cooperation in international tax
evasion cases87. Until this moment, Swiss banks were able to refuse to hand over
information on clients who were investigated on criminal charges of tax evasion in their
home countries by arguing that the same crime that they were accused of was not a crime in
Switzerland. The Swiss Government’s response to the threat of the demise of it’s banking
secrecy reputation, a competitive advantage of the Swiss banking industry, was swift and
very powerful, it threatened to seize all UBS documents relevant to the US case in order to
prevent them to be handed over as a result of the Miami court case, resulting in immediate
information on US clients holding UBS deposits.
Based on each country’s argumentation of the matter, the addition of article 26 of
the OECD Model convention and the existence of the information exchange doctrine, the
Swiss government conceded into handing over names and account information of
approximately 445088 US clients suspected of tax evasion. This, arguably falls well short of
the 52000 names initially requested by the US in this matter, but represented a landmark
decision, which effectively ended Switzerland’s position on refusal of information
exchange.

5.3.4
International
effects


Following this decision, based on the same argumentation of Switzerland to refuse

any kind of automatic information exchange based on fishing expedition but forced into

86
OECD Removed Switzerland from the gray list on September 25th following the signing of its 12’th
information exchange agreement, with Qatar.
87
Article 26 OECD Model Tax Convention which states that a country cannot refuse to provide information
on the grounds that the tax offence in question is not a criminal offence under it’s own laws
88
‘US, Switzerland to sign treaty to share tax info’ Associated Press online, 23’rd September 2009


 

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cooperating on specific tax evasion cases, UBS was forced in 2009 to hand over names and
account information to French, British and German authorities which demanded them.
The same model was applied in August and September 2009 to seal deals between
Liechtenstein on the one hand and France89, Britain90 and Germany91 on the other hand to
apply the same information exchange agreement on suspected tax evaders, a step short of
automatic exchange information but a step ahead of the confidentiality and protection that
banking secrecy offers.

4.3.5
Client
–
Bank
–
Government
triad


In as far as the relationship triad between clients, banks and governments go, the
power has shifted greatly in countries, which historically held a strong banking secrecy
reputation and law system. The UBS case is central in explaining the shift of this
relationship.
Before the case, clients of financial institutions incorporated in jurisdictions which
had strong banking secrecy laws could rely on those institutions to safe-guard their rights
and protect their confidentiality, at whatever cost to them. UBS has applied this approach
initially when it agreed on February 18th, 2009 to reach a settlement with the US
Government to pay 780 Million dollars in fines, penalties, interest and restitution. However
the international approach shifted greatly in 2009, specifically with the very strong push by
the OECD and it’s focus on cracking down on tax havens. When the international
legislative background consisting of the OECD Model Tax convention lead to higher
pressure on banking institutions they were unable fight the advancement of the information
exchange approach on their own. Countries who are based on strong banking sectors and
who rely on those sectors as a great part of their economies had to step in and protect their
legitimate interests. It is at this point when we now see that client’s confidentiality and right
being protected by governments, and not banks in themselves.
This current approach may have very interesting competitive results on the financial
sector. Potential customers will no longer look for the institution which can safeguard their
interests the most, but instead will make the decision of choosing the right bank based on

89
‘Liechtenstein, France to sign deal of tax evasion’ Associated Press Worldstream 15’th September 2009
90
‘Liechtenstein, Britain to sign deal of tax evasion’ Associated Press Financial Wire, 11’th August 2009
91
‘Liechtenstein, Germany to sign deal of tax evasion’ Associated Press, August 31’st 2009


 

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which government is better equipped to create an environment that better protects their
rights.
We are at the beginning of such a period, and since the developments and shifts of
this relationship go back only a few months it is hard to evaluate eloquent data on this
matter. In time we will see how this competitive scenario will unfold.

5.4
Summary


In this chapter we looked at the result of the Directive and the first review that in
accordance to Article 18 of the Directive, which was conducted in 2008. The main problem
was that in order to conduct a thorough analysis precise and adequate data is required,
however, the economic data available was not complete. This was a failure in the drafting
of the directive since no provisions were set to standardize the collection method of the
data. Where it did work out was in the areas where the withholding tax was applied but not
where the information exchange was applied and hence we can see that for several
countries the data was not available92. The main problems that the review set forth to
analyze were the concepts of beneficial ownership, the definition of the paying agent,
financial instruments that equivalent to those already covered and procedural aspects.
The question that arose regarding the beneficial ownership in the directive needs to
apply to the methods used by private individuals who intent to hide their identity of who is
actually beneficial owner of the interest in the end. Through the use of dummy corporations
or intermediary trustees this problem could be avoided, hence the review sets forth that
paying agents should have the obligations to use methods available to them such as
“customer due diligence: and anti-money laundering mechanism to find out who the end
beneficiary is.
Regarding the definition of a paying agent, the review suggests that this should also
apply to paying agent upon receipt, for example pension funds and investment funds where
the beneficiary is only entitled to the investment after maturity. This was the same
discussion as regarding to the treatment of financial instruments equivalent to those already
explicitly covered. However this presents various difficulties for the paying agent since

92
See table 1 at the start of chapter 5


 

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interest cannot be calculated on monthly or final bases of these funds. Hence it should be
the responsibility of the individual to declare these if one so chooses. The other problem is
that these funds might have started prior to this legislation and hence should not be
considered.
The procedural aspect relate to the collection of data and the treatment of UCITS.
The treatment varies between non-UCITS with legal personality (incorporated funds) and
those non-UCITS that lack legal personality (unincorporated or “contractual” funds and
trusts, etc). Generally speaking non-UCITS are within the scope of the directive since they
are paying agents upon receipt but again the calculation of such is difficult.
This chapter has also looked into the existing case law that has stemmed from the
directive itself and the outcome of this research has been quite limited. Although we briefly
present the underlying reasons for the commission to refer Luxembourg to the ECJ our aim
was to try to explain the lack of case law. Based on our analysis of the litigation gap, we
concluded that there were mixed reasons for the lack of case law: one of the most important
ones was the ease with which the directive can be circumvented, even though it had been
correctly transposed and implemented in national jurisdictions. The enforcer – player role
that the paying agents have had in this process could also have been another reason for the
lack of litigation.


 

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Chapter
VI
–
Macroeconomic
Effect
of
the
Directive


Introduction


In this chapter we will look at the hypothetical long-term implications of this

directive from a macroeconomic perspective. When looking at historical events and
consequences, we believe to be able to draw on these events as well as theory to anticipate
the unintended consequence that this directive will have upon the European Union.
Capital flight is a consequence that we are already seeing, as investors transfer their
funds to Asia (Chapter 3). The classic use of the term is described to widespread currency
speculation, in regards to cross-border activity, large enough to affect national financial
markets. No one wants to be caught holding assets that lose 20 to 30 percent of their value
overnight, but this was the case on June 1, 2005 with the implementation of the Savings
Tax Directive.93 Generally, capital flight is a short-lived endeavor, as it returns after
devaluation occurred, ie. “Hot money”, the problem is that Euro is very strong and hence it
could be that the money is gone for good, however for this discussion we will avoid market
currency driven speculative movements but acknowledge that they factor in.
This directive not only infringes the sovereignty of the state but also compromised
that of the individual, since one cannot escape the taxation of one’s own country even when
one chooses to not save or invest there but rather in other member state where the rates are
better. In order to understand this we will first establish the framework for this theory, then
look at unintended consequences for the EU, and finally prognoses what could happen in
the near future for the EU in terms of tax harmonization or tax competition.

6.1
Framework


The main option that the developed community has to reduce the tax benefits of
capital flight is by having rich and poor countries adopt new tax treaties and exchange
information on income paid to foreigners. In the United States, prior to the termination in

93
Particularly for those who had their accounts in one of the jurisdictions where withholding tax applied.


 

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1984 of the 30 percent withholding tax on U.S. portfolio income paid to foreigners and a
similar lack of reporting by European governments are often blamed for encouraging
capital outflows to those OFC.94Offshore tax havens and international competition for
capital makes ratifying new tax treaties very difficult and time consuming, as we could see
in Chapter 3 and will discuss in Chapter 8.
In order to attract foreign investment, countries must establish an appropriate
environment to stimulate local and foreign investors. The constant competition of creating a
more competitive national investment environment than that of other jurisdictions has made
tax competition become a more important factor influencing global investment flows.
Empirical evidence has revealed that FDI is becoming more and more sensitive to taxation,
according to Altshuler and others.95 Their studies found that US multinationals become
more sensitive to taxes on FDI between 1984 and 1992, their results suggest that countries
with tax rates 10% higher than those in other countries received 30% less FDI, allowing for
other factors. In Europe, tax competition on portfolio investments was pretty intensive;
capital moved from high taxed countries such as Sweden, France and German towards low
tax countries such as Luxembourg and Ireland. When Germany introduced a 10%
withholding tax on domestic interest payments in 1989, it caused a massive movement of
funds towards Luxembourg.96
A study by Huizinga and Nicodeme97 shows that for the 19 countries involved in
that study that “‘external deposits are positively related to interest income and wealth taxes,
and to the presence of domestic bank interest reporting.’ They also noticed that ‘the tax
sensitivity of international deposits appears to be higher in 1999 than before. This is to be
expected, as advances in ICT have reduced the costs of international banking.’”98Especially
now, with the proposed legislation to abolish or cross border transaction fees within the
EU, to be put into force by 2011. Since the implementation of the euro, it has accomplished
increased cross-border competition and transfers since it eliminates currency risk and

94
Darryl McLeod, Capital Flight, Library of Economics and Liberty, accessed December 8, 2009
95
Altshuler, R., H. Grubert, and S. Newlon, Has US investment abroad become more sensitive to tax rates?,
International Taxation and Multinational Activity
96
European Parliament (2000), Tax-Co-ordination in the European Union, Working Paper ECON 125, p. 15
97
Huizinga, H. and G. Nicodeme (2001), Are International Deposits Tax-driven?, European Commission
Economic Paper No. 152
98
Extract from – D. Chobanov, G. Angelov, M. Dimitov, European Union Savings Directive: Effects on
Bulgaria, Institute for Market Economy, August 2004, p. 13


 

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narrows interest rates differentials in Europe and hence has intensified tax competition as in
the case of Ireland. This was the aim of the euro, however with this directive it seems that
the Commission is ‘burdening’ its citizens if they decide to keep their savings in another
Member State in order to reap the benefits of competition, this goes against creating a
common market with is the ultimate aim of the European Union.
The most probable consequence stemming from this Directive would be capital
leakage towards jurisdictions outside of its scope. Norway99 and Singapore100, for instance,
are not in the EU and are currently not proposing to introduce similar measures. Another
possible direction is Hong Kong. Bermuda is another, where the directive has not (at least
currently) been adopted. As we could see in Chapter 4, this directive leaves too many
loopholes, and it probably that the developments as seen in Chapter 5 will lead to
innovative ideas for even more stringent information sharing. Some might argue that this
would create additional stimuli for capital flight outside of the scope of the EU Savings
Directive.

6.2
Law
of
Unintended
Consequences


Since the status now for a EU citizen is that his savings income gets taxed no matter
where one keeps it (as long as it’s within the scope of the directive), it will be taxed the
same. In a sense that creates tax harmonization, however now the incentive of a competitive
market to persuade customers to save has diminished. So how true is Benjamin Franklin’s
saying now, a penny saved is a penny earned?
With diminishing incentive to save, consumption increases which is good for the
economy especially in its current state. However consumption without an adequate savings
base is detrimental as we could see in the case of the US and UK in recent years. When this
happens persona debt increases, which de facto means that national debt increases. That
means that there is less money available for investment; add to that capital leakage due to
this directive it means that national deficit and current account deficit will tend to increase
as well. The long-term repercussions of such an event is inflation in the worse case

99
Jean Chartier, Taxation: Commission Plans to Toughen Up Fight Against Tax Evasion, November 25, 2008
100
See Annex 2: It is interesting to note that Singapore has not yet decided to implement the information
exchange in terms of a bilateral agreement and Norway which has some only to other jurisdictions which are
also known as offshore financial centers.


 

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scenario, currently the euro zone could afford this since the value of the euro is quite high
and a lower euro would mean that the products would be more affordable abroad, but that is
not what the European Bank desires, and since governments are already struggling to keep
their books in check the European Bank will not allow for interest rate increase. In the
current financial and Economic this effect of national debt has brought some developed EU
countries on the brink of disaster: Greece, Spain, or Portugal may face terrible
repercussions due to their huge national debt levels.
While before, capital used to stay within the community due to competition and low
currency risk which made it advantageous, but those days are gone and so is the capital; at
least in terms of private beneficiaries. So one might speculate that companies are next and
in a sense they are according to the Review by the Commission in 2008 (seen Chapter 5).
Those that are set up as financial vehicles for private persons are planned to be targeted in
the revision of the directive, however this might discourage regular businesses as well. In a
market-oriented environment conditions need to be created to encourage savings
‘repatriation’ in order to have capital that will improve local businesses to gain access to
capital (as well as lowering taxes and quasi taxes, and streamlining regulations). These
restrictions as a consequence of the directive will most likely lead to the opposite effect due
to leakage of capital and a lower incentive to save by residents.
The rate of growth in terms of GDP is directly linked to capital supply, hence a
lower capital supply will decrease the rate of growth of GDP especially for the new
member states. Economic growth depends crucially on the accumulation of capital. The
more capital that is within the economy, the more productivity, the more production per
worker; therefore the higher the available capital is for business to expand, the higher the
economic growth will be. The EU Savings Directive has led to and will continue to lead to
less capital available within the European market and economic growth, in the worse case,
could stagnate. Most likely it will not; however Europe is losing with every euro that
leaves. Some Countries have experienced negative growth rates in 2009 and addressing
those figures is a major concern for 2010.


 

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6.3
Tax
Harmonization
vs.
Tax
Competition


We can see that this directive leads into the discussion of which direction the
European Union should go in terms of taxation, and while we have established in the
previous chapters that taxation is not with the scope of the EU but rather to be determined
by the member states themselves, this directive in effect could be the stepping stone
towards a unified tax policy for the EU. While there are two possible directions that could
occur for the EU in the future, their decision of which to foster could go either towards tax
harmonization or tax competition, could have serious effects on the future competitive
advantage of Europe.
In order to attract jobs, savings and investments we have established that
governments need to provide certain incentives for businesses, which might be lower taxes
and/or better public services. When capital is missing, that becomes difficult. “Tax
competition occurs when individuals can choose among jurisdictions with different levels
of taxation when deciding where to work, save and invest.”101 Tax competition hence
forces politicians to be fiscally responsible, and as every type of market competition, tax
competition would increase efficiency of production and lower its costs.
Tax harmonization on the other hand would have the opposite effect especially in
Europe where the higher tax countries as can be seen in Graph 1 (Chapter 2); Denmark,
Sweden, and Belgium would be the focus on convergence. It would mean restrictions on
competition, cartels and/or monopolies. Economic theory tells us that monopolies lead to
higher prices and lower quality of goods sold which would not be the case in Europe for
now since harmonization is still far from being accomplished especially if we look at the
gap of development between the old member states and new ones however harmonization
would mean higher taxes and less efficiency of government expenditures. It is
understandable from Graph 1 that the new members (Bulgaria and Romania) have lower
taxes since they wish to attract capital, but this directive undermines this effect since there
is no more an advantage for the investor since they would get taxes on their income at that
place of residence.

101
Mitchell, D. (2001), A Tax Competition Primer: Why tax harmonization and information exchange
undermines America’s advantage in the global economy, Heritage Foundation Backgrounder No. 1460


 

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 The Authors of this paper see tax competition as a right of countries to regulate their
financial affairs. If it is in the national interest to balance national income with the
attraction of foreign capital through the establishment of a favorable tax regime they should
be allowed to do so. A de facto analysis of the STD shows that this right is undermined. In
Chapter 9 this relationship will be closely analyzed.


 6.3.1
What’s
so
bad
with
higher
taxes?


• Higher taxes seize a higher proportion of one’s income and therefore limits
the individual’s freedom to consume or to save. Since a larger portion is
withheld by the government through taxes, people are less better off and
have less personal freedom to choose what to do with their money.102 (As
we stated before, people would hence rather spend their capital than to save
it.)
• Higher taxes distort economic mechanisms through the deadweight loss that
is the net loss to society because of higher taxes, since capital cannot be
reinvested in business. Deadweight loss increases faster than that of increase
of taxes because it the squared result of the increase of tax. For example
should taxes be raised by a factor of 4 then the deadweight loss will be
raised by a factor of 16. The costs that higher taxes place on the efficiency of
the economy is that there will be less capital available on the market and
hence less capital accumulation which is needed to allow for investments to
businesses which could then increase their overall efficiency.103
• Higher taxes also increase the underground economy, stimulate corruption
and decrease tax collection (exception Scandinavia) and gives rise to tax
evasion as we could see in the Alligham-Sandmo model (Chapter 2). This
means that governments will have higher administrative costs combating

102
D. Chobanov, G. Angelov, M. Dimitov, European Union Savings Directive: Effects on Bulgaria, Institute
for Market Economy, August 2004, p. 17
103
D. Chobanov, G. Angelov, M. Dimitov, European Union Savings Directive: Effects on Bulgaria, Institute
for Market Economy, August 2004, p. 17


 

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 these effects and increase regulations, which means that the business
environment will be worse off, and growth will slow down.104
• Higher taxes decrease capital formation and hence less capital in the system
mean less economic growth and less business development hence lower
employment. This is particularly true for capital taxation – “reducing capital
income taxation from its current US level to zero would increase the
balanced-growth capital stock by 30 to 60 percent.”105 Another example
would be Ireland, where its low tax policy within the last 15 years made
Ireland the second richest nation in the European Union.
Taxes serve an important tool for eliminating poverty, and balancing social welfare,
increase access to education and healthcare; however, from a business point of view, the
reduction of available funds for savings and investment may reduce the overall welfare of
society, rather than increase it. Businesses are the ones that provide jobs, and creating jobs
creates other taxable sources.
Higher taxes only lead to a redistribution of wealth, some government use tends to
be inefficient, and has a marginal effect on growth, development and prosperity of a
country
As we can see higher taxes will put Europe at less competitive advantage and is
harmful for promoting convergence within Europe in terms of economic development for
those member states that still need to catch up. Therefore a policy that promotes tax
competition would be beneficial to the European Union and will lead to capital
accumulation within Europe. More savings means more investing since banks will have
capital to give to businesses and hence faster growth and less unemployment. Taxes
withhold capital from the market.
However with the implementation we saw in Chapter 3 that multinational banks
have developed their private banking sector in Asia in order to appease their stakeholders
and avoid the directive. Since a EU citizen will be charged the same wherever they may
keep their savings with Europe, the incentive to avoid this taxation by moving it outside the
scope of the directive increases. Therefore we will have capital leakage to Asia as long as

104
Laffer, A. (2004), The Laffer Curve: Past, Present, and Future, Heritage Foundation Backgrounder No.
1765
105
Lucas, R. (2003), Macroeconomic Priorities, American Economic Association Presidential Address


 

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they not within the scope of the directive, but even if they do sign on there will always be
an economic incentive for at least one jurisdiction not to jump off board and in the days of
a global economy there always will be one. Even the Business and Industry Advisory
Committee to the OECD stated that, “In the global economy, international tax competition
among nations tends to keep the negative effects of taxation limited. […] Low tax rates
tend to impose a discipline on the countries levying such taxes to make more efficient use
of tax revenues in their spending decision.”106

6.4
Summary


In this chapter we took a hypothetical discussion on the macroeconomic

implications of the directive upon the European Union community as a whole. Is this the
first set towards a tax harmonization within the Union? Hopefully not, as we can see that
this would undermine the efforts to promote convergence towards the wealth members of
the Union. Our framework sets forth that the directive has lead towards capital leakage
outside of the European Union and this causes problems since there will be less FDI from
within the European Union. Altshuler has stated that FDI has become increasingly sensitive
towards taxation, and hence the need for creating a more competitive national investment
environments than that of others has made tax competition become a more important factor
influencing global investment flows.
We even the benefit of historical hindsight with the example of Germany
introducing a 10% withholding tax on domestic interest payments in 1989, which it caused
a massive movement of funds to Luxembourg. So what is to stop the directive from having
any effects other than capital flow outside of its scope?
The euro has accomplished increased cross-border competition and transfers since
there was no more currency risk, but now this directive could lead the community in the
wrong direction. It has become a burden to citizens who decide to invest in other member
states since the incentive is lost. The unintended consequences are that savings will lower
while consumption will increase since the individual we get more for their money, but this
means that individual debt increases consequence national debt as well. This means that in

106
Business and Industry Advisory Committee to the OECD (1999), A Business View of Tax Competition,
Business and Industry Advisory Committee


 

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the end national debt increase and should the volume be large enough could lead on a pan-
European level inflation. Finally we looked at the harmful effects of higher taxation and
well as that of a tax harmonization policy. Tax competition would be better and would
incentive individuals to invest within Europe: key example being the case of Ireland.
In the current situation, it would not be surprising to see more tax avoidance
through capital leakage towards countries that are outside the scope of the directive.


 

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Chapter
VII
–
Remaining
Jurisdictional
Loopholes


Introduction


In this chapter we will analyze the implications of the remaining geographical and
jurisdictional loopholes that remain. As the information exchange regime increases in its
scope there are still several jurisdictions that remain unsusceptible. They have established
themselves in a niche market and are going to enjoy the lucrative business that their
stubborn stance will bring them; through capital leakage to their jurisdictions, effectively
making them the new OFCs. The other issue that still needs to be resolved is a mechanism
between the developed nations since as we can see in Annex 2 the bilateral agreements are
predominately between the developed nations and the traditional OFCs. But first we will
discuss how the exclusion of Bermuda in the directive has affected other jurisdictions.

7.1
The
Bermuda
Triangle


The Bermuda triangle has been known to seafarers throughout the ages where ships
get lost, but seems to also have been lost when the Savings Tax Directive has been
legislated. (See Annex 1) Bermuda seems to have been missed out by accident. But when
looking at the OECD listing of bi-lateral agreements (Annex 2) it seems that only the
Nordic countries (2009) as well as the UK and Ireland (2007) have sign bilateral
agreements that enforce information exchange with Bermuda. This was probably triggered
by a migration of funds to financial centers outside those that have signed up for the
directive back in 2005.107But for the rest of Europe, Bermuda remains a safe haven for now
as long as the paying agent is not located in a country subject to the directive.108
In addition, Bermuda has enacted further legislation that makes it easier to invest
there should the directive take effect in any form.109 By simplify the recognition process of

107
Teresa Hunter, Tax Dodgers feel the heat, Scotland on Sunday, June 19, 2005
108
Offshore: Bermuda, The Lawyer, November 7, 2005
109
Exempted Partnerships Amendment Act 2005, Limited Partnership Amendment Act 2005, Overseas
Partnerships Amendment Act 2005, and the Stamp Duties Amendment Act 2005 – source: Offshore:
Bermuda, The Lawyer, November 7, 2005


 

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partnerships from abroad; it has in effect made it easier for natural persons to circumvent
the directive by establishing a partnership and being recognized in Bermuda. Hence the
member state from which these nationals are from cannot tax the income from savings
since the money is actually held by a legal person (company). Nevertheless, Bermuda is
now on the OECD “white” list as it has accomplished the arbitrary threshold of 12 bilateral
international tax-information exchange agreements.110(Annex 2) But what does that mean?
Not much, as these agreements in conjunction with the legislation passed in Bermuda still
allow legal persons to earn interest on their savings, the only difference is that it will not go
to John Smith (natural person) but to John Smith Ltd. (legal person).

7.2
The
New
OFCs


The traditional OFCs such as the Cayman Islands, Isle of Man, Luxembourg, and
Switzerland have all in been incorporated into the Savings Tax Directive, with further
insight we can see that these traditional OFCs have also engaged in Bilateral treaties on
information exchange making them in effect obsolete from the view point as a tax shelter
for private individuals.111 Where should one go to shelter their hard earned money? Well
when analyzing Annex 2 we can see a trend that new OFCs have emerged. We have briefly
discussed this in Chapters 3 and 6 where the private banking sector is flourishing in
Singapore and Hong Kong. When looking at Annex 2 we can see that Dubai, Hong Kong
and Singapore have not made any concessions on information exchange and to this point
have not signed any bilateral agreements to this effect, furthermore they are also outside the
scope of the Saving Tax Directive. As long as these and other’s exist there will never be a
“level” playing field. While the EU commissioner for taxation acknowledges that Hong
Kong and Singapore are important financial centers, it is not only the big ones that are
cause for concern, as long as there is just one nation that does not sign onto either option
(STD or information exchange (OECD)) there will never be a level playing field and this
will just cause a shift in the financial markets, much of that to the detriment of those that
have already signed on. Particular to the European’s states that have gone to full
compliance with the Directive and information exchange, this will cause capital leakage

110
Whiter than white; Tax havens under pressure, The Economist, June 20, 2009
111
See 7.1 Bermuda is an exception however has now also implemented information exchange.


 

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away from their markets and to the new OFCs. While Maria Assimakopoulou,
spokeswomen for Laszlo Kovacs, the EU commissioner for taxation says, “Hong Kong and
Singapore are important financial centers and we have to find solutions to avoid tax evasion
and create a level playing field among offshore centers” it important to note that the
individuals who seek global mobility to their financial estates are not parse conducting tax
evasion but rather avoidance since what they are doing is fully legal.
Singapore at this time has seen the advantage of become a niche market for the
private banking sector and banks are responding. Due to the directive, many banks have
expanded their operation with the private banking sector in particular in Singapore. In an
interview with Daniel Truchi by Leslie Yee112, he says that European clients are drawn to
park their assets in Singapore not just because of the tax-friendly environment, but also
because their confidentiality is better secured in Singapore than in Switzerland since the
directive took force. Since banking secrecy is embedded in Singaporean banking law, it
restricted as to whom and what they can release. As long as this doesn’t change it is highly
unlikely that the information exchange proposed by the OECD and the Directive can
increase their scope to also apply to Singapore.
A government spokesman of Hong Kong113, said that “ we consider that our current
legal framework governing the exchange of tax information is appropriate for Hong Kong,
and we have no intention of changing it.” He went further to say that “Our tax authority
cannot, in a response to a request from an overseas tax authority, take active steps to obtain
the requested information, unless it would also require the information for its own
purposes.” They acknowledge that there is money flowing in from Europe, and while it
adds to the momentum that Hong Kong and Singapore enjoy, they say that is it
insignificant to that momentum. While this is true, it certainly does effect the EU member
states in the amount that they can gain access to from their citizens who have decided to
conduct their savings in those jurisdictions.
Dubai being already a regional financial center, it could be presumed that Dubai
also has the intention to will become a new OFC just like Abu Dhabi both of which are not

112
Leslie Yee, Private banking bubble building up in Singapore; New entrants tout bargain-basement fees to
buy market share; SG exec, The Business Times Singapore, Sept. 14, 2006
113
Daniel Hilken, Policy on exchange of tax data to stay; Official rules out changes as EU seeks talks to cut
flow of billions of euros in tax avoidance funds, South China Morning Post, Sept. 25, 2006


 

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listed on Annex 2. Any initiative will take years to get these countries on board,
considering how long it took to get this directive in the first place. The question is how
much will this cost the developed nations and will the returns outweigh the costs.114 One
can only speculate, considering how ineffective it was in Europe in terms of how much the
member states anticipate to fill their coffers that such efforts might not be worth it in the
end.

7.3
US
/
EU
Information
Exchange


Both the United States and EU agree that there needs to be a new type of
supervision on the banking system, both at local level and at a global level, however the
approach is different. The EU implemented the Saving Tax Directive and the US tries to
secure its assets through bilateral treaties. But the big difference is that in the US, a
mechanism for a withholding tax or information exchange will not be implemented. The
reason behind this is that in the US, citizens are obligated to report their taxes115 no matter
where they are living or working or where their wealth is generated.116 Hence the need for
the mechanism such as in Europe is not needed locally in the US, since any unclaimed
income would be considered tax evasion in the US. In Europe, taxes are generally collected
by the tax and the source. The individual still has to define earnings other than from
traditional employment. However, there is a lot of trans-Atlantic wealth generation and as
could be seen in the UBS case (Section 5.3.3), there are US citizens that are involved in tax
evasion since they did not report their earnings from abroad according to the US laws. This
could be done before since the Swiss legislators had a different definition and banking
secrecy. However now when looking at Annex 2, the United States has signed the arbitrary
number of 12 bilateral agreements: all with the traditional renowned OFCs. A system of
information exchange between the US and EU would accommodate both sides and allow
for more transparency; however currently there is no such mechanism.

114
Daniel Hilken, Policy on exchange of tax data to stay; Official rules out changes as EU seeks talks to cut
flow of billions of euros in tax avoidance funds, South China Morning Post, Sept. 25, 2006
115
In the United States, the IRS estimates that in 2007, Americans owed $345 billion more than they paid, or
about 14% of the federal revenues for the fiscal year of 2007. Wendy Kaufman, Random Tax Audits Return
to the IRS, October 9, 2007, NPR
116
Azrin Asmani, S’pore among targets as EU clamps down on tax avoidance; Private banking business may
be hit if Europe succeeds in widening tax net, The Straits Times (Singapore), September 5, 2006


 

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7.3
Summary


In this chapter we analyzed the implications of the remaining geographical and

jurisdictional loopholes that remain. While trying to create a global level playing field, it is
in a sense also a prisoner’s dilemma since as long as just one jurisdiction does not sign on,
these initiatives will fail. As the information exchange regime increases in its scope there
are still several jurisdictions that remain unsusceptible. We discussed Bermuda, how it has
come into compliance while still maintaining its competitive edge by simplifying the
process of recognition for partnership agreements, which then fall outside of the scope of
these initiatives. The new players on this market, Dubai, Singapore and Hong Kong are
already well-established financial centers but will also become OFCs as long as they do not
conform to a system of information exchange. They have established themselves in a niche
market and are going to enjoy the lucrative business that this position provides; through
capital leakage to their jurisdictions. Finally, the US has a system where individuals are
responsible for reporting their taxes while in Europe the state determines the taxes that one
is liable for (predominately), a system of information exchange between the US and EU
would allow for this initiative to be much more effective, however currently there is no
such mechanism.117

117
So far, there hasn’t been any further information to a full scope of information exchange on paying agents
between the US and EU other than those already implemented for issues of money laundering and the
financing of terrorism.


 

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Chapter
VIII
–
The
new
international
regulatory
framework


Introduction


This chapter dedicates itself to looking into how the international mindset changed,
following the introduction of the information exchange regime and the implementation of
the savings tax directive in the EU. We set out in this chapter to look into the latest changes
on the global news agenda in relation to taxation matters in order to see whether the balance
of regulatory power has indeed shifted from the national to the supra-national.
The biggest focus of this chapter will be to analyze the OECD’s implication in
furthering the doctrine of information exchange, and how this affects EU and national
regulation as well as the international capital markets.
The OECD’s system of law, it’s organizational regulations, dispute resolution,
decisional procedure and regulatory powers are issues that would very well be sources for
many other academic papers, in light of the huge amount of information and debatable
subjects within this field we limit ourselves to provide information which is relevant only
to our discussion on the present state and future of the information exchange regime and
it’s effect on individual taxation of EU residents and the EC as a whole. We leave all other
political, legal and economic discussions that could stem from a more in depth look into the
OECD’s workings to other, more focused papers.

8.1
The
OECD
Model
Tax
Convention


One of the OECD’s most prominent roles as an international body regulating tax
global cooperation is to regularly provide it’s Member States with model tax agreements on
which they can base their bi-lateral tax agreements. These model conventions are non
binding on the member states to start with, but become so on contracting parties which
extract the model agreement, tailor it to their respective situation and become signatories,
making it a part of their national heritage of international agreements, binding to residents
of that particular member state.


 

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 These model tax agreements are amended regularly by the Committee of Fiscal
affairs to correspond with the international consensus on tax matters at that time and push
further cooperation and coordination in tax policies around the world, the most relevant
version of this tax convention has been approved on 15’th of July 2005 by the Council of
the OECD, the same year of the coming into force of the EU savings tax directive.

8.2.1
Article
26,
2005
Model
tax
convention


The first time the concept of information exchange has been specified into the
OECD model tax convention was on the version approved on the 28th of January 2005, in
article 26, at that time, the article contained only 2 paragraphs, and they regulated that any
exchange of information shall take place between competent authorities of signatory
member states in as far as it is necessary to carry out provisions of the convention and their
national laws. Any such information is to be treated secret by the competent authorities
established by law to gather similar information from domestic sources.118 The same
version of the convention also established that no other information will be gathered by any
means other than those already in place at a national level in order to carry out the
provisions of the convention119 or impose any obligation on that member to supply trade,
business, industrial or professional secrets, which would be contrary to public policy120.
On the 15’th of July 2005 two more paragraphs were added to article 26, these
paragraphs make it clear that a state cannot refuse a request for information solely because
it has no domestic tax interest in the information121or solely because it is held by a bank or
other financial institution122. The requirements of the aforementioned paragraph contradict
the concept of banking secrecy, however, the OECD regarded this issue and answered
concerns by saying: ‘Bank secrecy is not incompatible with the requirements of Article 26,
and virtually all countries have bank secrecy or confidentiality rules. Meeting the standard
of Article 26 requires only limited exceptions to bank secrecy rules and would not
undermine the confidence of citizens in the protection of their privacy‘

118
2003 Model Tax Convention, Article 26 Paragraph 1
119
2003 Model Tax Convention, Article 26 Paragraph 2 (b)
120
2003 Model Tax Convention, Article 26 Paragraph 2 (c)
121
2005 Model Tax Convention, Article 26 Paragraph 4
122
2005 Model Tax Convention, Article 26 Paragraph 5


 

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 It does not come as a surprise that Austria, Belgium, Luxembourg and Switzerland
have entered reservations to article 26 and have refused to apply them in their early stages
of introduction, from their point of view, article 26 would have posed a very real threat to
the security and trust of their essential banking industry.123 However, in March 2009 each
of these countries notified the OECD that they were withdrawing their reservations to
article 26124
On the implementation of article 26, the OECD comments ‘Article 26 creates an
obligation to exchange information that is foreseeable relevant to the correct application of
a tax convention as well as for purposes of the administration and enforcement of domestic
tax laws of the contracting states. Countries are not at liberty to engage in “fishing
expeditions” or to request information that is unlikely to be relevant to the tax affairs of a
given taxpayer. In formulating their requests, the requesting state should demonstrate the
foreseeable relevance of the requested information. In addition, the requesting state should
also have pursued all domestic means to access the requested information except those that
would give rise to disproportionate difficulties.’125This however represents the
interpretation of the convention and such a paragraph does not exist in the convention itself.

8.2
The
agreement
on
Information
Exchange


Article 26 of the Model tax convention, which is the basis of more than 3000126 Bi-
lateral tax agreements around the world provided the legal background for a more extensive
coordination of tax policies, in order to facilitate the transfer of information and give a
broader scope to the concept of information exchange the OECD provided a model
agreements on information exchange, which was based on article 26, and put very strong
political pressure a wide number of countries to apply such an agreement. As a result, a
total number of 173 Bi-lateral agreements based on this model have been signed since
2000, A complete list of these agreements have been provided in annex 2. It is worth
123
Reservations mentioned in the current edition of the OECD Model tax convention, updated on 17’th July
2008
124
These developments will be reflected in the next update of the Model Tax Convention, due to be released
in 2010
125
www.OECD.org – Home – Information Exchange – Article 26 of the OECD model tax convention on
Income and capital – visited 20’th November 2009 -
http://www.oecd.org/document/53/0,3343,en_2649_33767_33614197_1_1_1_1,00.html
126
Source – www.OECD.org – Model Tax Convention, visited 20’th November 2009


 

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mentioning that from 2000 to 2005 only 8 agreements were signed, and only involving the
United States, the vast majority of the other agreements came after 2005 with the most in
2009.
These agreements provide that information exchange shall take place on all issues
involving tax matters, and shall allow the competent authorities to gain access to any
information on a certain tax resident that is in the possession of the other signatory of the
agreement. This provision, as stated in article 26, cannot force the other signatory state to
gather information other than it already has at it’s disposal.
The model agreement provides that exchange of information shall be done on all
information that is relevant to the determination, assessment and collection of such taxes, the
recovery and enforcement of tax claims, or the investigation or prosecution of tax matters127.
The agreement also specifies, that no country can refuse information exchange on the basis that
the tax offense is not covered by the provisions of it’s national laws. ‘The competent authority
of the requested Party shall provide upon request information for the purposes referred to
in Article 1. Such information shall be exchanged without regard to whether the conduct
being investigated would constitute a crime under the laws of the requested Party if such
conduct occurred in the requested Party.’128

8.2.1
Possible
Loopholes
to
be
exploited


It is to be said that, as seen above, the model agreement on information exchange of

tax matters is very broad in terms of taxes covered and information to be handed out. The
agreement provides that the Jurisdiction requested to provide information will conduct fact
finding operations, even though the information gathered will not be needed for the
application of its own laws and taxes129. A very surprising and strong provision, which may
impose high costs on countries with an undeveloped tax system.
We do however see a great potential for interpretation in a latter article of the Model
Agreement. Article 7 provides a list of exceptions to information exchange, namely,
situations in which a request to provide information may be declined. Although some of
them are straightforward and not-surprising, following international standards (Non-

127
Article 1, Model Agreement on information exchange on tax matters
128
Article 5 (1) Model agreement on information exchange on tax matters
129
Article 5(2) Model Agreement on information exchange on tax matters


 

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discrimination130, disclosure of trade, professional, industrial, commercial or business
secrets131, public policy132 and information of confidential nature, such as information
between a client and it’s attorney133). What is really interesting within this article is that any
Jurisdiction called upon to provide information, for the application of effective taxation
may only provide information that is obtained through the precise legal means in place in
the system of the jurisdiction in question134: ‘The requested Party shall not be required to
obtain or provide information that the applicant Party would not be able to obtain under its
own laws for purposes of the administration or enforcement of its own tax laws. The
competent authority of the requested Party may decline to assist where the request is not
made in conformity with this Agreement. This provision allows small countries, whose
banking sector is crucial to their survival to alter its own laws in order to maintain their
status and reputation as a tax haven. This potentially deregulatory race to the bottom may
have harmful effects on the effective implementation of this information exchange treaty.
Such a claim may not be made however at this time, empirical study of precise systems of
law will give evidence in the future whether established tax havens will take measures to
limit their own national powers in order to hinder the application of this treaty.

8.3
Savings
Tax
Directive
vs
OECD
Approach


It is evident that the OECD approach and implementation of information exchange

has come down much stronger and with a much wider scope than what the EU tried to
achieve in with the savings tax directive of 2005. As we have seen in chapter 4, the
existence of many loopholes and geographical limitations made it easy for the effects of the
law to be circumvented. Based on the review of 2008 and the large economic consensus on
this matter, the OECD took matter into its own hands and put very strong political pressure
on a large group of countries in order to enforce its standards on Information exchange.

130
Article 7(6) Model Agreement on information exchange on tax matters
131
Article 7(2) Model Agreement on information exchange on tax matters
132
Article 7(4) Model Agreement on information exchange on tax matters
133
Article 7(3) Model Agreement on information exchange on tax matters
134
Article 7(1) Model Agreement on information exchange on tax matters


 

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 The exact means this has been achieved will not be discussed in depth in this paper,
however we will try to build a comprehensive timeline of events that led to the 173
agreements achieved so far, and the many more which are expected.
The Information exchange system in place after the EU directive was implemented
was very narrow in scope, it facilitated effective taxation on interest gained on savings held
by EU residents but it did not, by far address the issue of tax avoidance and tax evasion.
Existing loopholes in legislation made it very easy for EU residents to use other financial
instruments, use other financial centers around the world and manipulate legislative
regulation in order to avoid prosecution. It had become clear that the supra-national level of
tax cooperation had failed to achieve its purpose and it was up to the traditional, national
level to combat the effects of tax evasion and avoidance. A large number of bi-lateral
agreements were needed in order to regulate the world market. This is clearly the less
efficient approach, but has proven more effective so far.
The OECD Model tax convention’s article 26, created the legislative basis for the
information exchange regime, dubbed by the organization as the new tax ‘standard’. The
aim of the standard was to promote international co-operation in tax matters through
exchange of information. It was developed by the OECD Global Forum Working Group on
Effective Exchange of Information (“the Working Group”). The Working Group consisted
of representatives from OECD Member countries as well as delegates from Aruba,
Bermuda, Bahrain, Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, the Netherlands
Antilles, the Seychelles and San Marino.
In order to ensure the propagation of this agreement around the jurisdictions of the
world’s financial centers the OECD took a ‘whip’ approach, it used its list of ‘non
cooperative countries on tax matters’ to impose sanctions on jurisdictions that fail the
implement the new standards, it also chose an arbitrary number of agreements that had to
be signed by every country on the black and gray list in order to be moved into the
‘substantially implemented” list: 12, This approach proved very successful and ‘In May
2009, the Committee on Fiscal Affairs decided to remove all three remaining jurisdictions
(Andorra, the Principality of Liechtenstein and the Principality of Monaco) from the list of
uncooperative tax havens in the light of their commitments to implement the OECD
standards of transparency and effective exchange of information and the timetable they set


 

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for the implementation. As a result, no jurisdiction is currently listed as an unco-operative
tax haven by the Committee on Fiscal Affairs.’135A complete list of countries, which has
substantially implemented the OECD information exchange standards, can be found in
Annex 3.
The shift back to the traditional approach of taxation regulation is evident in the
OECD’s view point: ‘In today’s globalised economy effective information exchange is
essential for countries to maintain sovereignty over the application and enforcement of
their tax laws and to ensure the correct application of tax conventions. While taxpayers can
operate relatively unconstrained by national borders, tax authorities must respect these
borders in carrying out their functions. Exchange of information provisions offer them a
legal framework for co-operating across borders without violating the sovereignty of other
countries or the rights of taxpayer’136
The extensive use of Bi-lateral agreements have made it possible for the information
exchange regime to extend far beyond the limited scope of the STD, and has now close to
including essential financial centers like Singapore and Macao and it moved from only
applying to information exchange on interest payments on savings to a complete
information exchange on all matters related to taxation. There seems to be no more places
to hide under the new international regulatory framework, and banking secrecy, as we
know it is coming to an end.


 8.3.1
Geographical
scope
loophole
addressed.


As mentioned in chapters IV and V, the EU STD had extensive limitations in

regards to its geographical application. Because simply moving funds to other jurisdictions
could have circumvented the provisions but the OECD has partly solved some of those
concerns. It is clearly easier and more realistic to have this loophole closed by using the
OECD as a forum rather than imposing a EU directive worldwide, and we may see it
extending to jurisdictions that the EU could not. However, if we look into the agreements
(presented in Annex 2) already signed, the countries that are an actual issue for capital

135
http://www.oecd.org/document/57/0,3343,en_2649_33745_30578809_1_1_1_1,00.html Visited 20’th
November 2009
136
http://www.oecd.org/about/0,3347,en_2649_33767_1_1_1_1_1,00.html Visited 20’th November 2009


 

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leakage after the STD’s implementation have not signed on to the OECD’s information
exchange regime.


 8.3.2
Beneficial
owner
loophole
closed
off.


One of the easiest way to circumvent the STD was by simply hiding a natural
person who was the owner of investment capital behind a company, trust fund, or any other
form of legal entities which were clearly outside the scope of the directive, this issue has
been addressed by the bi-lateral agreement approach thusly closing off this loophole
completely. As mentioned earlier in this chapter, the information exchange regime
envisioned by the OECD covers information transfer on all beneficial owners, both legal
and natural persons.


 8.3.3
Subject
matter
loophole
addressed.


The STD refers to information exchange or withholding tax on interest earned on

savings accounts, and does not apply to a very wide range of other financial instruments or
debt claims. It was relatively easy for interested parties to avoid being subject to the
directive by simply investing in another financial asset, which fell outside the scope. This is
another issue that was fixed by the OECD’s approach. It covers a much wider array of
financial instruments, which were not covered by the STD.
The OECD’s achievements in 2009 are unparalleled, in the course of just 1 year, ,
more than 100 agreements were signed, and a lot more are to follow, effectively
establishing a worldwide information exchange system, build on a very large web of
bilateral agreements based on one standard. The scope of the information exchange regime
established with the support of the OECD is huge compared to the STD, it encompasses
both information on individuals other legal bodies and companies, it extends its reach to
cover information related to taxes on income and profit, capital and net wealth, estate and
inheritance137 as well as any other taxes that signatory countries wish to add.

8.3.4
Limitations
of
the
OECD’s
approach


The only limitation in scope of this approach compared to the STD is that all this
information is to be handed over upon request, and signatory states cannot engage in
phishing operations, they can request specific information on specific tax subjects. The
137
Agreement on information exchange of tax matters, article 3 (1)


 

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STD regime provides for an automatic, non-discriminatory, exchange of information,
making it less costly to maintain and more likely to be applied to the entire base of targeted
beneficiaries.

8.4
Summary


We are, without a doubt, at a crucial moment in time in regards to taxation maters,

international tax avoidance and evasion and information exchange regime. The remarkable
recent turn of events, possibly accelerated by the financial crisis, have brought the tax
havens at a turning point. Having adhered to tax cooperation agreements and information
exchange systems, traditional tax haven jurisdictions have possibly lost their competitive
advantage. Their banking and financial sectors, crucial to the functioning of their economy
cannot attract clients that wish to escape tax burdens in their home states and must come up
with a new value proposition or face extinction.
The European attempt to legislate tax matters at a supra-national level has reached a
standstill and it has been partially overshadowed by the parallel, bilateral system
established with the aid of the OECD. The early negotiations on the directive are
responsible for creating the international drive to an information exchange regime on tax
matters and it’s partial failure inspired the new approach. The two systems will continue to
function at the same time, with automatic exchange within the EU, and an system of
information exchange on request with the rest of the world, either way, There is no place
under the sun for tax evaders anymore. Or is there?
Legislation on this issue is so new, that it has not been subject to official review yet,
the application and implementation of most agreements has not even been ratified in most
signatory countries, ratification being necessary in order for the international agreements to
become a binding part of that countries legal system – a traditional approach to
international law, different from the EU system. While this system is still building up there
is a lot of room for the process to be set off course, As discussed in chapter III, it could


 

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have taken only one jurisdiction138 to demolish years of negotiation of the STD, and the
same outcome is possible with the new system.
If the competing financial centers notice that a leveling playing field has not been
created, and due to refusal of just a few jurisdictions to apply such measures places them at
a competitive advantage the entire house of cards could crumble and all the measures taken
so far could be negated. It is however too early into the process to make such predictions,
the international drive led by the OECD and the G20 nations is too strong at this point to be
offset by the ‘trivial’ interests of smaller states.

138
Gibraltar initially failed to apply equivalent measures to the savings tax directive of 2005, almost sparking
a chain reaction in the other dependent and associated territories that would have prevented the STD from
coming into effect


 

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Chapter
IX
–
Final
Conclusions


9.1
The
world
of
Taxes



 9.1.1
Financing
the
mandatory
functions
of
the
state


It is difficult for any society to agree on what is the optimal level of taxation
suitable for attaining the best level of economic efficiency, social fairness and wealth
disparity. Different countries around the world have accepted and implemented very
different tax models, ranging from the strong welfare states of northern Europe, to the very
liberal, newer members from the South East. Although it is evident that an agreement on
this matter will never be reached, a discussion on this subject has no place in this paper, it is
worth mentioning however, that taxes are an essential part of a democratic and capitalist
country which is based on the free market and on private property. Indifferent of the size of
the capital it requires, any state has to provide certain functions such as public
infrastructure, finance, health care, education, internal and external protection, the
Constituent functions: protection of life, liberty and property, together with all the other
functions necessary to the civic organization of society, functions which are not optional
for governments, even in the eyes of the strictest lesser faire139. In order to provide these
functions, in a state based on the free market, the only method of finance for the
government is taxation.


 9.1.2
Enforcing
taxation
policy


The government’s incentive to follow on its taxation policies and reduce any
possibility for its citizens to avoid paying their contribution to society is twofold: firstly, as
mentioned before, the yearly, necessary expenditure of the state in the exercise of its
functions is dependent on the collection of tax revenue, and secondly, it must send a clear
message of fairness to those that have lived up to their tax obligations in good faith that
they are not left on their own to contribute to the state finances. Governments, in order to

139
Woodrow Wilson, ‘ The functions of Governments’


 

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reduce the effects of free riding have to send a clear message to its citizens that it does not
pay to try to avoid your tax obligations.
With this in mind, however, we have constructed chapter III, and have looked into
the international understanding of an individual’s obligations to provide the state with the
necessary resources that enable it to carry on it’s functions. It is undeniable therefore, based
on the very numerous cases resolved in common law jurisdictions like the US and the UK
that it is within every individual’s right to seek the legal means of decreasing the amount of
his contribution, and by doing so cannot be held legally or morally liable for his actions.
Every man is entitled if he can to order his affairs so as that the tax attaching under
the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so
as to secure this result, then, however unappreciative the Commissioners of Inland Revenue
or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased
tax.140
This action is called tax avoidance and it has been at the core of our paper.
Although the line between tax avoidance and evasion has, historically been very blurry and
subject to political will, the difference between tax avoidance and tax evasion is the
thickness of a prison wall.141. Our findings in this paper seem to suggest that this line is
currently moving, expanding the scope of tax evasion over the once gray area of offshore
capital.
That being said, we have dedicated an entire chapter in describing the EU’s position
as the highest tax area in the world, and what effects this should have had on the stability of
the economy and the welfare of its citizens. In chapter 2 we have compiled a series of
statistical findings sourced to Eurostat and the EU commission that position the EU as one
of the richest GDP per capita region in the world. Adding the two facts together, it was our
conclusion that a high level of income put together with an even higher tax burden sets up
the scene for a very strong incentive to engage in tax avoidance. Although very few official
figures (most data is estimative and biased) have come to support this claim, the very strong
political drive of countries like the UK, Germany and France to push for legislation to limit

140
Lord Tomlin, in the UK House of Lords case, IRC v. Duke of Westminster (1936) 19 TC 490, [1936] AC
1:
141
Denis Healey, former UK Chancellor of the Exchequer:


 

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the extent of tax avoidance through capital movement are strong arguments that suggest
that these governments have seen a strong tendency for their residents to avoid taxation.

9.1.3
Taxing
Savings
–
Rationale
and
critique

One concern however that the research on taxation and its justification has raised
for us is the underlying rationale of taxing savings capital in the first place. While it is a
common standard accepted by OECD definitions and part of every country’s national
legislation, interest on saved capital is a taxable form of income. Why that is so is a
question we cannot seem to find a rational answer. Chapter VI touches on the need for an
economy to incentivize consumption, but a balance has to exist between consumption and
savings, taxing interest on capital raises the first and dis-incentivizes he latter. Economic
rationale aside, we find that it is also morally wrong to re-tax saved capital, evidently
because the income that has fueled that source has already been taxed once. The owed
contribution of the individual towards his government has been paid already and the
remaining amount should be in the hands of one’s rightful owner to use as one pleases. 

Another issue stemming from this discussion is the personal freedom that the capital
owner has to choose the international market one wishes to invest with all the benefit that
this choice implies. In our view, it is the right of any investor to forum shop the best
financial conditions given to one by a certain investment choice, including the legislative
and taxation policy applicable. If an investor chooses a market on the basis of taxation
applicable there than that choice becomes part of one’s portfolio and one may reap the
benefits of one’s choice.
Forcing investors to be taxed the same rates as those applicable in his home country
of residence is an abuse committed by powerful states which have no merit on the creation
of that taxable interest, have already received their share of taxes at the initial income
generated and should not claim any other contribution solely on the argument that the
investors residence is within its territory.
Unfortunately a moral discussion on the rationale of taxation and on legislation
aimed on enforcing such taxation policies does not belong in a business law paper, we have
however found it necessary to mention our concerns that were raised during the analysis of
the issue. In drafting any legislation, the regulator, in theory, has to perform a very detailed
and careful stakeholder analysis and must take into account all factors that may influence


 

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those stakeholders once the effects are in place. While the economic rationale may hold the
highest weight in the ultimate decision all other aspects should be weighed in as well. The
same statement becomes valid when balancing the legitimate interests of the different
groups that will be affected. It is widely accepted that in the current legislative process in
most democratic jurisdictions there is a very strong possibility that legislation passed will
not always be the most rational one due to the very powerful influence that certain interest
groups have over the regulators. In our case, the interest groups that push for stronger,
harder tax legislation are national governments themselves; their power to influence the
legislators is undeniable, even in democracies with clearly delimited legislative and
executive bodies.

9.2
Supranational
Legislation


This paper has shown that the recent history has brought a stronger political
consensus among the developed countries to tackle to issue of tax evasion and even tax
avoidance with a growing array of legislative acts. Research conducted in the field of
international financial markets has shown that capital movement has contributed to both
economic growths on one side, as well as tax evasion on the other. It is a well-known fact
that certain jurisdictions around the world had constructed a legislative and taxation
environment to attract capital whose owner wishes to escape the full burden of taxation in
his home of residence. For a large number of invoked reasons, ranging from the need to
combat terrorism to references of financial downturn and economic crisis, the developed
nations of the world have decided to regulate the outflow of capital towards these financial
centers.
The traditional approach to regulate international taxation matters has been the use
of bi-lateral agreements that states voluntarily enter into, based on a principle of
reciprocity. Mutual assistance is guaranteed in relation to double taxation rules, indirect
taxation accords and to some extent information exchange. Initially, these agreements were
limited in their scope and in their geographical reach. Jurisdictions that had to protect their
national banking industry, heavily reliant on capital inflow were reluctant to enter into
agreements that would undermine their legitimate economic interests.


 

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 9.2.1
The
EU
Savings
Tax
Directive
effects,
failure
and
merit


The EU took the first step out of this traditional approach, and negotiated the entry
into force of the Savings Tax Directive. The directive is a very controversial directive due
to its capability to produce legal effects outside the normal legal jurisdiction of EU law.
Sliding slightly off topic from our subject, it is worth noting that this approach, to
negotiate the entry into force of equivalent measures in jurisdictions that are normally
outside the EU capability to regulate but still carry very close ties to its residents, has been
a success. We may have not seen the last attempt to construct regulation in this manner by
the EU. In the ever more globalized world, where international trade, capital movement and
workforce mobility is at an all-time high, the European institutions may well have to resort
to the same political mechanism in order to reach other objectives in relation to the
regulation of conduct of EU natural and legal persons. Development in this area is highly
anticipated by the authors of this paper.
We have closely studied the effects of this directive in a number of chapters of this
paper and have come to the conclusion that its initial objective, to effectively tax capital
income held abroad by EU tax nationals has not been reached. Not only was the revenue
gain far from the expected amount, the law had a large number of unintended
consequences, discussed in chapter VI. The economic effect of the Directive will be to
reduce the propensity to save and reduce capital formation in the countries complying with
the Directive; this effect will be even stronger due to capital outflow that does form. The
capital formation and flight will lower the growth of GDP and reduce the overall wealth of
the EU citizens.142 Even more worrying is the long term effect on the EU economy, with
the reduced capital formation and capital flight, the efficient distribution of resources
possible with adequate levels of investment capital and private entrepreneurship, will stray
even further from its equilibrium point, affecting long term economic growth even further.

9.2.2
STD’s
relation
with
growth,
regional
policy
and
enlargement
strategy


The effects on newer member states pose a great deal of concern as well, and may
become a serious threat for the EU’s regional policy, leading to an increase in the cost of an
effective regional development plan. As discussed in chapter VI in more detail, with the

142
Leach, G. (2003), The negative impact of Taxation on economic growth.


 

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reduced incentive to move capital to higher growth area within the EU (traditionally the
newer members) these regions will lack the capital to fund their growth and hinder them
from catching up with the developed nations of the EU. It’s implications to regional and
expansion policies are evident.
The EU’s expenditure to fund underdeveloped regions and help them catch up with
the western countries will significantly go up. Ironically, for every euro lost from the
private sector, many more from the public sector will have to be spent, as the efficiency of
public money is far lower than private, especially when doing business in the newer
members of the EU. Ironically, the STD will cause more expenditure for Member States
than actual revenue. In terms of enlargement, the legislative package currently coming with
the EU has now become a little more unattractive for potential new member – granted it
may be too little to make a difference in the political decision of candidate countries, but
the effect does exist.

9.2.3
The
Directive
does
have
its
merits


It’s most resonant achievement has been the successful introduction and
dissemination of the information exchange regime. The notions of transparency and access
to information can hardly be argued against, even by the most hardy of interest groups, few
jurisdictions in the world can successfully defend a position based on secrecy and un-
cooperation. The gradual victories of the information exchange doctrine against banking
secrecy jurisdictions143 have paved the way for more international pressure to bring
information exchange as the standard of cooperation on all taxation matters, effectively
bringing an end to tax havens as we have come to know them.

9.3
The
movement
back
to
bi‐lateral
agreements


Although the power of the automatic exchange of information regime has not been
copied into the framework agreements created by the OECD, the extensions of scope have
more than made up for it. The OECD’s approach to tackle international tax evasion has
extended information exchange to cover natural and legal persons alike, more financial

143
See UBS vs. IRS Miami court case and its inter-governmental resolution


 

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instruments and more importantly it has allowed it to span the entire globe. The exact
mechanism is detailed and explained in chapter 7.
In today’s globalised economy effective information exchange is essential for
countries to maintain sovereignty over the application and enforcement of their tax laws
and to ensure the correct application of tax conventions. While taxpayers can operate
relatively unconstrained by national borders, tax authorities must respect these borders in
carrying out their functions. Exchange of information provisions offer them a legal
framework for co-operating across borders without violating the sovereignty of other
countries or the rights of taxpayers.144
The OECD has developed a number of instruments that provide a legal framework
for exchange of information, the most important of which is article 26 of the model tax
convention145 which had paved the way for a further, more in depth agreement on
information exchange and it’s application: the Agreement on Exchange of Information on
Tax Matters146(developed jointly with a number of non-member economies) and another
document, the ‘Council of Europe/OECD Convention on Mutual Administrative Assistance
in Tax Matters’
The progress attained in just a couple of years using this mechanism is astonishing,
as chapter VII explains, at the time of writing the most recent agreement had been signed
on the 18’th of November, the same day the chapter was being written, at the date of the
writing of this conclusion chapter, 9 more agreements were in place147. The diffusion speed
of this very strong agreement shows an unprecedented political drive to reduce the effects
of tax dodging through capital movement, the economic effects will surely be a reality in

144
http://www.oecd.org, information exchange tab, visited 09/12/2009
145
See annex 5, article 26 of the Model Tax Convention.
146
Explained in depth in chapter 7
147
· Bahamas - France (7 December 2009)
· Ireland - British Virgin Islands (7 December 2009)
· Bahamas - Belgium (7 December 2009)
· Bahamas - Netherlands (4 December 2009)
· Bahamas - Argentina (3 December 2009)
· Bahamas - China (1 December 2009)
· New Zealand - Saint Kitts and Nevis (24 November 2009)
· Liechtenstein - Antigua & Barbuda (24 November 2009)
· Argentina - Costa Rica (23 November 2009)


 

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the beginning of 2010, and it will be a very interesting topic for research for other
academics and economists.
The developments suggest that indeed, information exchange has become the
standard in international taxation cooperation and mutual assistance, and although it is one
step short of the automatic exchange of information regime regulated at an EU level, the
exchange of information on request is an essential step for more economic integration
among international capital markets.


 

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Authorship
commentary

The authors of this paper take responsibility for its full content and from, however
we find it useful to provide the reader with information on the authorship of each section,
as follows:

Chapter I Alexandru Catalin Floristean

Chapter II Robert Attila Fussi
Chapter III Robert Attila Fussi
Chapter IV Alexandru Catalin Floristean
Section V.1 Robert Attila Fussi
Section V.2 Alexandru Catalin Floristean
Chapter VI Robert Attila Fussi
Chapter VII Robert Attila Fussi
Chapter VIII Alexandru Catalin Floristean
Chapter IX Alexandru Catalin Floristean & Robert Attila Fussi


 

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—. Agreement on exchange of information and tax matters. Model Agreement. OECD.
Paris: OECD, n.d.
—. "Article 26 of the OECD Model Tax Convention on Income and Capital." Centre for
Tax Policy and Administration. OECD. 20 November 2009
<http://www.oecd.org/document/53/0,3343,en_2649_33767_33614197_1_1_1_1,00.html>.
—. "Article 26 of the OECD Model Tax Convention on Income and Capital." Centre for
Tax Policy and Administration. OECD. 20 November 2009
<http://www.oecd.org/document/53/0,3343,en_2649_33767_33614197_1_1_1_1,00.html>.
—. "Centre for Tax Policy and Administration." OECD. OECD. 20 November 2009
<http://www.oecd.org/about/0,3347,en_2649_33767_1_1_1_1_1,00.html>.
—. "Centre for Tax Policy and Administration." OECD. OECD. 20 November 2009
<http://www.oecd.org/about/0,3347,en_2649_33767_1_1_1_1_1,00.html>.
—. "List of Unco-operative Tax Havens." Centre for Tax Policy and Administration.
OECD. 20 November 2009
<http://www.oecd.org/document/57/0,3343,en_2649_33745_30578809_1_1_1_1,00.html>.
—. "OECD Model Tax Convention." 2008.
—. "Article 26 of the OECD Model Tax Convention on Income and Capital." Centre for
Tax Policy and Administration. OECD. 20 November 2009
<http://www.oecd.org/document/53/0,3343,en_2649_33767_33614197_1_1_1_1,00.html>.
—. "Centre for Tax Policy and Administration." OECD. OECD. 20 November 2009
<http://www.oecd.org/about/0,3347,en_2649_33767_1_1_1_1_1,00.html>.

Roberts, Richard. "Offshore Financial Centres." Edward Elgar Publishing, March 1994.


 

- 92 -


 

Sour, Laura. "An Economic Model of Tax Compliance with Individual Morality and Group
Conformity." 18 September 2003. 45.

The Council of the European Union. "Council Directive 2003/48/EC on taxation of savings
income in the form of interest payments." 2003/48/EC. Vol. OJ L 157. Brussels, 3 June
2003.
—. "Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws,
regulations and administrative provisions relating to undertakings for collective investment
in transferable securities (UCITS) ." The Official Journal of the European Union (1985).
—. "DIRECTIVE 2005/60/EC OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL of 26 October 2005 on the prevention of the use of the financial system for the
purpose of money laundering and terrorist financing." Official Journal of the European
Union (2005).

The European Commission. "Direct taxation: The Commission takes steps against
Luxembourg as regards the application of the Savings Tax Directive." IP/09/1013. Vol.
IP/09/1013. Brussels, 25 June 2009.
—. "Direct taxation: The European Commission refers Luxembourg to the European Court
of Justice over its incorrect application of the Savings Tax Directive." IP/08/1815. Vol.
IP/08/1815. Brussels, 27 November 2008.

"Whiter than white; Tax havens under pressure." The Economist 20 June 2009.

Wilson, Woodrow. "The Functions of Governments." Essay. 1886.

Wright, Tom. "Tax evaders keepstep ahead." The Interntional Herald Tribune 25 May
2005.

Yee, Leslie. "Private banking bubble building up in Singapore; New entrants tout bargain-
basement fees to buy market share; SG exec." The Business Times Singapore 14 September
2006.


 

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Annexes


Annex
1:
Table
of
jurisdictions
affected
by
the
STD


Country/Jurisdiction Status vis-a-vis EU Regime to be applied Comments

Under the joint control
Andorra Independent Withholding Tax
of France and Spain
UK Dependent
Anguilla Information Exchange
Territory
Dutch Dependent
Aruba Information Exchange
Territory
Withholding Tax
Austria Member State
(20%)
Bahamas Independent Not covered by STD
Withholding Tax
Belgium Member State
(20%)
UK Dependent Missed out by EU by
Bermuda Outside STD regime
Territory accident
UK Dependent Withholding Tax
British Virgin Islands
Territory (20%)
Bulgaria Member State Information Exchange
UK Dependent
Cayman Islands Information Exchange
Territory
Cyprus Member State Information Exchange
Czech Republic Member State Information Exchange
Denmark Member State Information Exchange
Estonia Member State Information Exchange
Finland Member State Information Exchange
France Member State Information Exchange
Germany Member State Information Exchange
Gibraltar UK Crown Colony Information Exchange
Greece Member State Information Exchange
Known as a 'Retention
UK Crown Withholding Tax Tax'; the client can
Guernsey
Dependency (20%) choose information
exchange as an option.
Hungary Member State Information Exchange
Ireland Member State Information Exchange
Known as a 'Retention
UK Crown Withholding Tax Tax'; the client can
Isle of Man
Dependency (20%) choose information
exchange as an option.
Italy Member State Information Exchange
Known as a 'Retention
UK Crown Withholding Tax Tax'; the client can
Jersey
Dependency (20%) choose information
exchange as an option.
Latvia Member State Information Exchange
Independent but Withholding Tax
Liechtenstein
follows Switzerland (20%)
Lithuania Member State Information Exchange
Withholding Tax
Luxembourg Member State
(20%)
Madeira Part of Portugal Information Exchange
Malta Member State Information Exchange
'Independent' but under
Monaco Information Exchange
France
UK Dependent
Monstserrat Information Exchange
Territory
Netherlands Member State Information Exchange
Dutch Dependent
Netherlands Antilles Information Exchange
Territory
Poland Member State Information Exchange
Portugal Member State Information Exchange
Romania Member State Information Exchange
San Marino Independent Information Exchange
Slovakia Member State Information Exchange
Slovenia Member State Information Exchange
Spain Member State Information Exchange
Sweden Member State Information Exchange
Affiliated to EU but not Withholding Tax
Switzerland
Member State (20%)
UK Dependent Withholding Tax
Turks & Caicos Islands
Territory (20%)
United Kingdom Member State Information Exchange
Has information
exchange with
USA Outside EU
Canada; undecided on
EU regime


 

- II -


 

Annex
2:
Bilateral
agreements
on
information
exchange
on
tax
matters


1. New Zealand - Bahamas (18 November 2009) 35. Austria - St Vincent & the Grendines (14 September 2009)
2. Belgium - Liechtenstein (10 November 2009) 36. Netherlands - Samoa (14 September 2009)
3. Netherlands - Liechtenstein (10 November 2009) 37. Netherlands - British Virgin Islands (11 September 2009)
4. Netherlands - Andorra (6 November 2009) 38. Netherlands Antilles - British Virgin Islands (11 September 2009)
5. Argentina - Andorra (26 October 2009) 39. Netherlands Antilles - St Kitts & Nevis (11 September 2009)
6. Belgium - Andorra (23 October 2009) 40. Aruba - St Kitts & Nevis (11 September 2009)
7. France - Cayman Islands (5 October 2009) 41. Denmark - Aruba (10 September 2009)
8. United Kingdom - Bahamas (29 October 2009) 42. The Faroe Islands - Aruba (10 September 2009)
9. Australia - Cook Islands (27 October 2009) 43. Finland - Aruba (10 September 2009)
10. Aruba - Bermuda (20 October 2009) 44. Greenland - Aruba (10 September 2009)
11. Faroes Islands - Gibraltar (20 October 2009) 45. Iceland - Aruba (10 September 2009)
12. Finland - Gibraltar (20 October 2009) 46. Norway - Aruba (10 September 2009)
13. Greenland - Gibraltar (20 October 2009) 47. Sweden - Aruba (10 September 2009)
14. Mexico - Bermuda (15 October 2009) 48. Denmark - Netherlands Antilles (10 September 2009)
15. Portugal - Gibraltar (14 October 2009) 49. The Faroe Islands - Netherlands Antilles (10 September 2009)
16. Ireland - Liechtenstein (13 October 2009) 50. Finland - Netherlands Antilles (10 September 2009)
17. France - Bermuda (8 October 2009) 51. Greenland - Netherlands Antilles (10 September 2009)
18. Australia - Guernsey (7 October 2009) 52. Iceland - Netherlands Antilles (10 September 2009)
19. Liechtenstein - St Vincent & the Grenadines (2 October 2009) 53. Sweden - Netherlands Antilles (10 September 2009)
20. Bermuda - Netherlands Antilles (28 Sept 2009) 54. The Faroe Islands - San Marino (10 September 2009)
21. The Bahamas - San Marino (24 September 2009) 55. United States - Monaco (8 September 2009)
22. France - San Marino (22 September 2009) 56. Denmark – Turks & Caicos Islands (7 September 2009)
23. France - Liechtenstein (22 September 2009) 57. Netherlands - Antigua & Barbuda (2 September 2009)
24. France - Gibraltar (22 September 2009) 58. Denmark - Antigua & Barbuda (2 September 2009)
25. France - Andorra (22 September 2009) 59. Denmark - Gibraltar (2 September 2009)
26. San Marino - Greenland (22 September 2009) 60. Denmark - Anguilla (2 September 2009)
27. Monaco - Liechtenstein (21 September 2009) 61. Germany - Liechtenstein (2 September 2009)
28. Monaco - Andorra (18 Septembre 2009) 62. Faroe Islands - St Vincent & the Grenadines (1 September 2009)
29. Monaco - Bahamas (18 September 2009) 63. Netherlands - St Vincent & the Grenadines (1 September 2009)
30. Andorra - San Marino (21 September 2009) 64. Denmark - St Vincent & Grenadines (1 September 2009)
31. Andorra - Liechtenstein (18 September 2009) 65. Denmark - St Kitts & Nevis (1 September 2009)
32. Austria - Gibraltar (17 September 2009) 66. Denmark - Antigua & Barbuda (1 September 2009)
33. Austria - Andorra (17 September 2009) 67. Netherlands – St Kitts & Nevis (1 September 2009)
34. Austria - Monaco (17 September 2009) 68. Canada - Netherlands Antilles (29 August 2009)
 69. United Kingdom - Gibraltar (27 August 2009)
70. Australia - Gibraltar (25 August 2009)
71. New Zealand - British Virgin Islands (14 August 2009)
72. New Zealand - Cayman Islands (14 August 2009)
73. New Zealand - Gibraltar (13 August 2009)
74. Germany - Gibraltar (13 August 2009)
75. United Kingdom - Liechtenstein (11 August 2009)
76. Monaco - San Marino (29 July 2009)
77. Bermuda - Ireland (28 July 2009)
78. New Zealand - Isle of Man (27 July 2009)
79. New Zealand - Jersey (27 July 2009)
80. United Kingdom - Turks & Caicos (23 July 2009)
81. Netherlands - Turks & Caicos (22 July 2009)
82. Netherlands - Anguilla (22 July 2009)
83. Ireland - Turks & Caicos (22 July 2009)
84. Ireland - Anguilla (22 July 2009)
85. New Zealand - Guernsey (21 July 2009)
86. UK - Anguilla (20 July 2009)
87. Belgium - Monaco (15 July 2009)
88. New Zealand - Cook Islands (9 July 2009)
89. Netherlands - Cayman Islands (8 July 2009)
90. Germany - Bermuda (3 July 2009)
91. Ireland - Gibraltar (24 June 2009)
92. Ireland - Cayman Islands (23 June 2009)
93. France - British Virgin Islands (17 June 09)
94. Australia - Jersey (10 June 2009)
95. The Netherlands - Bermuda (8 June 2009)
96. Denmark - British Virgin Islands (19 May 2009)
97. Faroes - British Virgin Islands (19 May 2009)
98. Finland - British Virgin Islands (19 May 2009)
99. Greenland - British Virgin Islands (19 May 2009)
100. Iceland - British Virgin Islands (19 May 2009)
101. Norway - British Virgin Islands (19 May 2009)
102. Sweden - British Virgin Islands (19 May 2009)
103. New Zealand - Bermuda (17 April 2009)
104. Denmark - Bermuda (16 April 2009)
105. Faroes - Bermuda (16 April 2009)
106. Finland - Bermuda (16 April 2009)
- IV -

107. Greenland - Bermuda (16 April 2009)
108. Iceland - Bermuda (16 April 2009)
109. Norway - Bermuda (16 April 2009)
110. Sweden - Bermuda (16 April 2009)
111. Denmark - Cayman Islands (1 April 2009)
112. Faroes - Cayman Islands (1 April 2009)
113. Finland - Cayman Islands (1 April 2009)
114. Greenland - Cayman Islands (1 April 2009)
115. Iceland - Cayman Islands (1 April 2009)
116. Norway - Cayman Islands (1 April 2009)
117. Sweden - Cayman Islands (1 April 2009)
118. USA - Gibraltar (31 March 2009)
119. France - Isle of Man (26 March 2009)
120. Ireland - Jersey (26 March 2009)
121. Ireland - Guernsey (26 March 2009)
122. Germany - Guernsey (26 March 2009)
123. France - Guernsey (24 March 2009)
124. France - Jersey (23 March 2009)
125. The United Kingdom - Jersey (10 March 2009)
126. Germany - Isle of Man (02 March 2009)
127. Australia - Isle of Man (29 January 2009)
128. The United Kingdom - Guernsey (20 January 2009)
129. The United States - Liechtenstein (8 December 2008)
130. The United Kingdom - British Virgin Islands (29 October 2008)
131. Denmark - Guernsey (28 October 2008)
132. Denmark - Jersey (28 October 2008)
133. Faroes - Guernsey (28 October 2008)
134. Faroes - Jersey (28 October 2008)
135. Finland - Guernsey (28 October 2008)
136. Finland - Jersey (28 October 2008)
137. Greenland - Guernsey (28 October 2008)
138. Greenland - Jersey (28 October 2008)
139. Iceland - Guernsey (28 October 2008)
140. Iceland - Jersey (28 October 2008)
141. Norway - Guernsey (28 October 2008)
142. Norway - Jersey (28 October 2008)
143. Sweden - Guernsey (28 October 2008)
144. Sweden - Jersey (28 October 2008)
 145. Australia - British Virgin Islands (27 October 2008)
146. Isle of Man - United Kindom (29 September 2008)
147. Jersey - Germany (4 July 2008)
148. Netherlands Antilles - Spain (10 June 2008) [A copy of the
agreement will be provided in due course]
149. Guernsey - Netherlands (25 April 2008)
150. Isle of Man - Ireland (24 April 2008)
151. Bermuda - United Kingdom (4 December 2007)
152. Denmark - Isle of Man (30 October 2007)
153. Faroes - Isle of Man (30 October 2007)
154. Finland - Isle of Man (30 October 2007)
155. Greenland - Isle of Man (30 October 2007)
156. Iceland - Isle of Man (30 October 2007)
157. Isle of Man - Norway (30 October 2007)
158. Isle of Man - Sweden (30 October 2007)
159. Jersey - Netherlands (20 June 2007)
160. Netherlands Antilles - New Zealand (01 March 2007)
161. Australia - Netherlands Antilles (01 March 2007)
162. Antigua & Barbuda - Australia (30 January 2007)
163. Australia - Bermuda (15 November 2005)
164. Isle of Man - Kingdom of The Netherlands (12 October 2005)
165. Aruba - United States (21 November 2003)
166. Jersey - United States (04 November 2002)
167. Isle of Man - United States (02 October 2002)
168. Guernsey - United States (19 September 2002)
169. Netherlands Antilles - United States (17 April 2002)
170. British Virgin Islands - United States (03 April 2002)
171. Bahamas - United States (25 January 2002)
172. Cayman Islands - United States (27 November 2001)
173. Antigua And Barbuda - United States (06 December 2000)


 

- V -


 

 Annex
 3:
 Jurisdictions
 that
 have
 substantially
 implemented
 the
 internationally

agreed
tax
standard


A progress report on the jurisdictions surveyed by the oecd global forum in

implementing the internationally agreed tax standard148 .Progress made as at 4th December
2009

Progress made as at 4th December 2009 (Original Progress Report 2nd April)
Jurisdictions that have substantially implemented the internationally agreed tax
standard
Argentina Estonia Jersey San Marino
Aruba Finland Korea Seychelles
Australia France Liechtenstein Singapore
Austria Germany Luxembourg Slovak Republic
Bahrain Gibraltar Malta Slovenia
Barbados Greece Mauritius South Africa
Belgium Guernsey Mexico Spain
Bermuda Hungary Monaco Sweden
British Virgin Islands Iceland Netherlands Switzerland
Canada India Netherlands Antilles Turkey
Cayman Islands Ireland New Zealand United Arab Emirates
China3 Isle of Man Norway United Kingdom
Cyprus Israel Poland United States
Czech Republic Italy Portugal US Virgin Islands
Denmark Japan Russian Federation

Jurisdictions that have committed to the internationally agreed tax standard, but have not yet
substantially implemented
Jurisdiction Year of Number of Jurisdiction Year of Nr of
Commitment Agreements Commitme Agreement
nt s
Tax Havens
Andorra 2009 (8) Nauru 2003 (0)
Anguilla 2002 (4) Niue 2002 (0)
Antigua and Barbuda 2002 (10) Panama 2002 (0)
Bahamas 2002 (8) St Kitts and 2002 (6)
Belize 2002 (0) Nevis 2002 (0)
Cook Islands 2002 (3) St Lucia 2002 (5)
Dominica 2002 (1) St Vincent and 2002 (3)

148
The internationally agreed tax standard, which was developed by the OECD in co-operation with non-
OECD countries and which was endorsed by G20 Finance Ministers at their Berlin Meeting in 2004 and by
the UN Committee of Experts on International Cooperation in Tax Matters at its October 2008 Meeting,
requires exchange of information on request in all tax matters for the administration and enforcement of
domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes. It
also provides for extensive safeguards to protect the confidentiality of the information exchanged.
Grenada 2002 (1) the Grenadines 2002 (5)
Liberia 2007 (0) Samoa 2003 (0)
Marshall Islands 2007 (1) Turks and
Montserrat 2002 (0) Caicos Islands
Vanuatu

Other Financial Centres

Brunei 2009 (7) Malaysia 2009 (3)
Chile 2009 (0) Philippines 2009 (0)
Costa Rica 2009 (1) Uruguay 2009 (2)
Guatemala 2009 (0)


 

- VII -


 

Annex
4,
List
of
the
30
Members
of
the
OECD


OECD Member Countries

Twenty countries originally signed the Convention on the Organization for

Economic Co-operation and Development on 14 December 1960. Since then a further ten
countries have become members of the Organization. The Member countries of the
Organization and the dates on which they deposited their instruments of ratification are:

Australia: 7 June 1971

Austria: 29 September 1961
Belgium: 13 September 1961
Canada: 10 April 1961
Czech republic: 21 December 1995
Denmark: 30 May 1961
Finland: 28 January 1969
France: 7 August 1961
Germany: 27 September 1961
Greece: 27 September 1961
Hungary: 7 May 1996
Iceland: 5 June 1961
Ireland: 17 August 1961
Italy: 29 March 1962
Japan: 28 April 1964
Korea: 12 December 1996
Luxembourg: 7 December 1961
Mexico: 18 May 1994
Netherlands: 13 November 1961
New Zealand: 29 May 1973
Norway: 4 July 1961
Poland: 22 November 1996
Portugal: 4 August 1961
Slovak republic: 14 December 2000
Spain: 3 August 1961
Sweden: 28 September 1961
Switzerland: 28 September 1961
Turkey: 2 August 1961
United Kingdom: 2 May 1961
United States: 12 April 1961


 

- VIII -


 

Annex
5,
Article
26
of
Model
tax
Convention


Article 26

EXCHANGE OF INFORMATION

1. The competent authorities of the Contracting States shall exchange such information as is
foreseeably relevant for carrying out the provisions of this Convention or to the
administration or enforcement of the domestic laws concerning taxes of every kind and
description imposed on behalf of the Contracting States, or of their political subdivisions or
local authorities, insofar as the taxation there under is not contrary to the Convention. The
exchange of information is not restricted by Articles 1 and 2.

2. Any information received under paragraph 1 by a Contracting State shall be treated as

secret in the same manner as information obtained under the domestic laws of that State
and shall be disclosed only to persons or authorities (including courts and administrative
bodies) concerned with the assessment or collection of, the enforcement or prosecution in
respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or
the oversight of the above. Such persons or authorities shall use the information only for
such purposes. They may disclose the information in public court proceedings or in judicial
decisions.

3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a

Contracting State the obligation:
a) to carry out administrative measures at variance with the laws and administrative
practice of that or of the other Contracting State;
b) to supply information which is not obtainable under the laws or in the normal course of
the administration of that or of the other Contracting State;
c) to supply information which would disclose any trade, business, industrial, commercial
or professional secret or trade process, or information the disclosure of which would be
contrary to public policy (ordre public).

4. If information is requested by a Contracting State in accordance with this Article, the

other Contracting State shall use its information gathering measures to obtain the requested
information, even though that other State may not need such information for its own tax
purposes. The obligation contained in the preceding sentence is subject to the limitations of
paragraph 3 but in no case shall such limitations be construed to permit a Contracting State
to decline to supply information solely because it has no domestic interest in such
information.


 

- IX -


 

5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State
to decline to supply information solely because the information is held by a bank, other
financial institution, nominee or person acting in an agency or a fiduciary capacity or
because it relates to ownership interests in a person.


 

- X -


 

Annex
6,
The
Savings
Tax
Directive


COUNCIL DIRECTIVE 2003/48/EC

of 3 June 2003
on taxation of savings income in the form of interest payments
(OJ L 157, 26.6.2003, p. 38)
Amended by:
Official Journal
►M1 Council Directive 2004/66/EC of 26 April 2004 L 168 35 1.5.2004
►M2 Council Decision 2004/587/EC of 19 July 2004 L 257 7 4.8.2004
►M3 Council Directive 2006/98/EC of 20 November 2006 L 363 129 20.12.2006

COUNCIL DIRECTIVE 2003/48/EC

of 3 June 2003
on taxation of savings income in the form of interest payments

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and
in particular Article 94 thereof,
Having regard to the proposal from the Commission (1),
Having regard to the opinion of the European Parliament (2),
Having regard to the opinion of the European Economic and Social
Committee (3),
Whereas:
(1) Articles 56 to 60 of the Treaty guarantee the free movement of capital.
(2) Savings income in the form of interest payments from debt claims constitutes taxable
income for residents of all Member States.
(3) By virtue of Article 58(1) of the Treaty Member States have the right to apply the
relevant provisions of their tax law which distinguish between taxpayers who are not in the
same situation with regard to their place of residence or with regard to the place where their


 

- XI -


 

capital is invested, and to take all requisite measures to prevent infringements of national
law and regulations, in particular in the field of taxation.
(4) In accordance with Article 58(3) of the Treaty, the provisions of Member States' tax law
designed to counter abuse or fraud should not constitute a means of arbitrary discrimination
or a disguised restriction on the free movement of capital and payments as established by
Article 56 of the Treaty.
(5) In the absence of any coordination of national tax systems for taxation of savings
income in the form of interest payments, particularly as far as the treatment of interest
received by non residents is concerned, residents of Member States are currently often able
to avoid any form of taxation in their Member State of residence on interest they receive in
another Member State.
(6) This situation is creating distortions in the capital movements between Member States,
which are incompatible with the internal market.
(7) This Directive builds on the consensus reached at the Santa Maria da Feira European
Council of 19 June 2000 and 20 June 2000and the subsequent Ecofin Council meetings of
26 November2000 and 27 November 2000, 13 December 2001 and 21January 2003.
(8) The ultimate aim of this Directive is to enable savings income in the form of interest
payments made in one Member State to beneficial owners who are individuals resident in
another Member State to be made subject to effective taxation in accordance with the laws
of the latter Member State.
(9) The aim of this Directive can best be achieved by targeting interest payments made or
secured by economic operators established in the Member States to or for the benefit of
beneficial owners who are individuals resident in another Member State.
(10) Since the objective of this Directive cannot be sufficiently achieved by the Member
States, because of the lack of any coordination of national systems for the taxation of
savings income, and can therefore be better achieved at Community level, the Community
may adopt measures in accordance with the principle of subsidiarity as set out in Article 5
of the Treaty. In accordance with the principle of proportionality, as set out in that Article,
this Directive confines itself to the minimum required in order to achieve those objectives
and does not go beyond what is necessary for that purpose.


 

- XII -


 

(11) The paying agent is the economic operator who pays interest to or secures the payment
of interest for the immediate benefit of the beneficial owner.
(12) In defining the notion of interest payment and the paying agent mechanism, reference
should be made, where appropriate, to Council Directive 85/611/EEC of 20 December 1985
on the coordination of laws, regulations and administrative provisions relating to
undertakings for collective investment in transferable securities (UCITS) (1).
(13) The scope of this Directive should be limited to taxation of savings income in the form
of interest payments on debt claims, to the exclusion, inter alia, of the issues relating to the
taxation of pension and insurance benefits.
(14) The ultimate aim of bringing about effective taxation of interest payments in the
beneficial owner's Member State of residence for tax purposes can be achieved through the
exchange of information concerning interest payments between Member States.
(15) Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by
the competent authorities of the Member States in the field of direct and indirect taxation
(2) already provides a basis for Member States to exchange information for tax purposes on
the income covered by this Directive. It should continue to apply to such exchanges of
information in addition to this Directive insofar as this Directive does not derogate from it.
(16) The automatic exchange of information between Member States concerning interest
payments covered by this Directive makes possible the effective taxation of those payments
in the beneficial owner's Member State of residence for tax purposes in accordance with the
national laws of that State. It is therefore necessary to stipulate that Member States which
exchange information pursuant to this Directive should not be permitted to rely on the
limits to the exchange of information as set out in Article8 of Directive 77/799/EEC.
(17) In view of structural differences, Austria, Belgium and Luxembourg cannot apply the
automatic exchange of information at the same time as the other Member States. During a
transitional period, given that a withholding tax can ensure a minimum level of effective
taxation, especially at a rate increasing progressively to 35 %, these three Member States
should apply a withholding tax to the savings income covered by this Directive.
(18) In order to avoid differences in treatment, Austria, Belgium and Luxembourg should
not be obliged to apply automatic exchange of information before the Swiss Confederation,
the Principality of Andorra, the Principality of Liechtenstein, the Principality of Monaco


 

- XIII -


 

and the Republic of San Marino ensure effective exchange of information on request
concerning payments of interest.
(19) Those Member States should transfer the greater part of their revenue of this
withholding tax to the Member State of residence of the beneficial owner of the interest.
(20) Those Member States should provide for a procedure allowing beneficial owners
resident for tax purposes in other Member States to avoid the imposition of this
withholding tax by authorizing their paying agent to report the interest payments or by
presenting a certificate issued by the competent authority of their Member State of
residence for tax purposes.
(21) The Member State of residence for tax purposes of the beneficial
owner should ensure the elimination of any double taxation of the interest payments which
might result from the imposition of this withholding tax in accordance with the procedures
laid down in this Directive. It should do so by crediting this withholding tax up to the
amount of tax due in its territory and by reimbursing to the beneficial owner any excess
amount of tax withheld. It may, however, instead of applying this tax credit mechanism,
grant are fund of the withholding tax.
(22) In order to avoid market disruption, this Directive should, during the transitional
period, not apply to interest payments on certain negotiable debt securities.
(23) This Directive should not preclude Member States from levying other types of
withholding tax than that referred to in this Directive on interest arising in their territories.
(24) So long as the United States of America, Switzerland, Andorra, Liechtenstein,
Monaco, San Marino and the relevant dependent or associated territories of the Member
States do not all apply measures equivalent to, or the same as, those provided for by this
Directive, capital flight towards these countries and territories could imperil the attainment
of its objectives. Therefore, it is necessary for the Directive to apply from the same date as
that on which all these countries and territories apply such measures.
(25) The Commission should report every three years on the operation of this Directive and
propose to the Council any amendments that prove necessary in order better to ensure
effective taxation of savings income and to remove undesirable distortions of competition.
(26) This Directive respects the fundamental rights and principles which are recognized, in
particular, by the Charter of Fundamental Rights of the European Union,


 

- XIV -


 

HAS ADOPTED THIS DIRECTIVE:

CHAPTER I
INTRODUCTORY PROVISIONS
Article 1

Aim
1. The ultimate aim of the Directive is to enable savings income in the form of interest
payments made in one Member State to beneficial owners who are individuals resident for
tax purposes in another Member State to be made subject to effective taxation in
accordance with the laws of the latter Member State.
2. Member States shall take the necessary measures to ensure that the tasks necessary for
the implementation of this Directive are carried out by paying agents established within
their territory, irrespective of the place of establishment of the debtor of the debt claim
producing the interest.

Article 2
Definition of beneficial owner
1. For the purposes of this Directive, ‘beneficial owner’ means any individual who receives
an interest payment or any individual for whom an interest payment is secured, unless he
provides evidence that it was not received or secured for his own benefit, that is to say that:
(a) he acts as a paying agent within the meaning of Article 4(1); or
(b) he acts on behalf of a legal person, an entity which is taxed on its profits under the
general arrangements for business taxation, an UCITS authorized in accordance with
Directive 85/611/EEC or an entity referred to in Article 4(2) of this Directive and, in the
last mentioned case, discloses the name and address of that entity to the economic operator
making the interest payment and the latter communicates such information to the competent
authority of its Member State of establishment, or
(c) he acts on behalf of another individual who is the beneficial owner and discloses to the
paying agent the identity of that beneficial owner in accordance with Article 3(2).


 

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2. Where a paying agent has information suggesting that the individual who receives an
interest payment or for whom an interest payment is secured may not be the beneficial
owner, and where neither paragraph 1(a) nor 1(b) applies to that individual, it shall take
reasonable steps to establish the identity of the beneficial owner in accordance with Article
3(2). If the paying agent is unable to identify the beneficial owner, it shall treat the
individual in question as the beneficial owner.

Article 3
Identity and residence of beneficial owners
1. Each Member State shall, within its territory, adopt and ensure the application of the
procedures necessary to allow the paying agent to identify the beneficial owners and their
residence for the purposes of Articles 8 to 12.Such procedures shall comply with the
minimum standards established in paragraphs 2 and 3.
2. The paying agent shall establish the identity of the beneficial owner on the basis of
minimum standards which vary according to when relations between the paying agent and
the recipient of the interest are entered into, as follows:
(a) for contractual relations entered into before 1 January 2004, the paying agent shall
establish the identity of the beneficial owner, consisting of his name and address, by using
the information at its disposal, in particular pursuant to the regulations in force in its State
of establishment and to Council Directive 91/308/EEC of 10June 1991 on prevention of the
use of the financial system for the purpose of money laundering (1);
(b) for contractual relations entered into, or transactions carried out in the absence of
contractual relations, on or after 1 January 2004, the paying agent shall establish the
identity of the beneficial owner, consisting of the name, address and, if there is one, the tax
identification number allocated by the Member State of residence for tax purposes. These
details shall be established on the basis of the passport or of the official identity card
presented by the beneficial owner. If it does not appear on that passport or on that official
identity card, the address shall be established on the basis of any other documentary proof
of identity presented by the beneficial owner. If the tax identification number is not
mentioned on the passport, on the official identity card or any other documentary proof of
identity, including, possibly, the certificate of residence for tax purposes, presented by the


 

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beneficial owner, the identity shall be supplemented by a reference to the latter's date and
place of birth established on the basis of his passport or official identification card.
3. The paying agent shall establish the residence of the beneficial owner on the basis of
minimum standards which vary according to when relations between the paying agent and
the recipient of the interest are entered into. Subject to the conditions set out below,
residence shall be considered to be situated in the country where the beneficial owner has
his permanent address:
(a) for contractual relations entered into before 1 January 2004, the paying agent shall
establish the residence of the beneficial owner by using the information at its disposal, in
particular pursuant to the regulations in force in its State of establishment and to
Directive91/308/EEC;
(b) for contractual relations entered into, or transactions carried out in the absence of
contractual relations, on or after 1 January 2004, the paying agent shall establish the
residence of the beneficial owner on the basis of the address mentioned on the passport, on
the official identity card or, if necessary, on the basis of any documentary proof of identity
presented by the beneficial owner and according to the following procedure: for individuals
presenting a passport or official identity card issued by a Member State who declare
themselves to be resident in a third country, residence shall be established by means of a
tax residence certificate issued by the competent authority of the third country in which the
individual claims to be resident. Failing the presentation of such a certificate, the Member
State which issued the passport or other official identity document shall be considered to be
the country of residence.

Article 4
Definition of paying agent
1. For the purposes of this Directive, ‘paying agent’ means any economic operator who
pays interest to or secures the payment of interest for the immediate benefit of the
beneficial owner, whether the operator is the debtor of the debt claim which produces the
interest or the operator charged by the debtor or the beneficial owner with paying interest or
securing the payment of interest.


 

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2. Any entity established in a Member State to which interest is paid or for which interest is
secured for the benefit of the beneficial owner shall also be considered a paying agent upon
such payment or securing of such payment. This provision shall not apply if the economic
operator has reason to believe, on the basis of official evidence produced by that entity,
that:
(a) it is a legal person, with the exception of those legal persons referred to in paragraph 5;
or
(b) its profits are taxed under the general arrangements for business taxation; or
(c) it is an UCITS recognized in accordance with Directive 85/611/EEC.
An economic operator paying interest to, or securing interest for, such an entity established
in another Member State which is considered a paying agent under this paragraph shall
communicate the name and address of the entity and the total amount of interest paid to, or
secured for, the entity to the competent authority of its Member State of establishment,
which shall pass this information on to the competent authority of the Member State where
the entity is established.
3. The entity referred to in paragraph 2 shall, however, have the option of being treated for
the purposes of this Directive as an UCITS as referred to in 2(c). The exercise of this option
shall require a certificate to be issued by the Member State in which the entity is established
and presented to the economic operator by that entity. Member States shall lay down the
detailed rules for this option for entities established in their territory.
4. Where the economic operator and the entity referred to in paragraph 2 are established in
the same Member State, that Member State shall take the necessary measures to ensure that
the entity complies with the provisions of this Directive when it acts as a paying agent.
5. The legal persons exempted from paragraph 2(a) are:
(a) in Finland: avoin yhtiö (Ay) and kommandiittiyhtiö (Ky)/öppetbolag and
kommanditbolag;
(b) in Sweden: handelsbolag (HB) and kommanditbolag (KB).

Article 5
Definition of competent authority
For the purposes of this Directive, ‘competent authority’ means:


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(a) for Member States, any of the authorities notified by the Member States to the
Commission;
(b) for third countries, the competent authority for the purposes of bilateral or multilateral
tax conventions or, failing that, such other authority as is competent to issue certificates of
residence for tax purposes.
Article 6
Definition of interest payment
1. For the purposes of this Directive, ‘interest payment’ means:
(a) interest paid or credited to an account, relating to debt claims of every kind, whether or
not secured by mortgage and whether or not carrying a right to participate in the debtor's
profits, and, in particular, income from government securities and income from bonds or
debentures, including premiums and prizes attaching to such securities, bonds or
debentures; penalty charges for late payments shall not be regarded as interest payments;
(b) interest accrued or capitalized at the sale, refund or redemption of the debt claims
referred to in (a);
(c) income deriving from interest payments either directly or through an entity referred to in
Article 4(2), distributed by:
(i) an UCITS authorized in accordance with Directive 85/611/EEC,
(ii) entities which qualify for the option under Article 4(3),
(iii) undertakings for collective investment established outside the territory referred to in
Article 7;
(d) income realized upon the sale, refund or redemption of shares or units in the following
undertakings and entities, if they invest directly or indirectly, via other undertakings for
collective investment or entities referred to below, more than 40 % of their assets in debt
claims as referred to in (a):
(i) an UCITS authorized in accordance with Directive 85/611/EEC,
(ii) entities which qualify for the option under Article 4(3),
(iii) undertakings for collective investment established outside the territory referred to in
Article 7.


 

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However, Member States shall have the option of including income mentioned under (d) in
the definition of interest only to the extent that such income corresponds to gains directly or
indirectly deriving from interest payments within the meaning of (a) and (b).
2. As regards paragraph 1(c) and (d), when a paying agent has no information concerning
the proportion of the income which derives from interest payments, the total amount of the
income shall be considered an interest payment.
3. As regards paragraph 1(d), when a paying agent has no information concerning the
percentage of the assets invested in debt claims or in shares or units as defined in that
paragraph, that percentage shall be considered to be above 40 %. Where he cannot
determine the amount of income realized by the beneficial owner, the income shall be
deemed to correspond to the proceeds of the sale, refund or redemption of the shares or
units.
4. When interest, as defined in paragraph 1, is paid to or credited to an account held by an
entity referred to in Article 4(2), such entity not having qualified for the option under
Article 4(3), it shall be considered an interest payment by such entity.
5. As regards paragraph 1(b) and (d), Member States shall have the option of requiring
paying agents in their territory to annualize the interest over a period of time which may not
exceed one year, and treating such annualized interest as an interest payment even if no
sale, redemption or refund occurs during that period.
6. By way of derogation from paragraphs 1(c) and (d), Member States shall have the option
of excluding from the definition of interest payment any income referred to in those
provisions from undertakings or entities established within their territory where the
investment in debt claims referred to in paragraph 1(a) of such entities has not exceeded 15
% of their assets. Likewise, by way of derogation from paragraph 4, Member States shall
have the option of excluding from the definition of interest payment in paragraph 1 interest
paid or credited to an account of an entity referred to in Article 4(2) which has not qualified
for the option under Article 4(3) and is established within their territory, where the
investment of such an entity in debt claims referred to in paragraph 1(a) has not exceeded
15 % of its assets. The exercise of such option by a Member State shall be binding on other
Member States.


 

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7. The percentage referred to in paragraph 1(d) and paragraph 3 shall from 1 January 2011
be 25 %.
8. The percentages referred to in paragraph 1(d) and in paragraph 6shall be determined by
reference to the investment policy as laid down in the fund rules or instruments of
incorporation of the undertakings or entities concerned and, failing which, by reference to
the actual composition of the assets of the undertakings or entities concerned.

Article 7
Territorial scope
This Directive shall apply to interest paid by a paying agent established within the territory
to which the Treaty applies by virtue of Article 299thereof.

CHAPTER II
EXCHANGE OF INFORMATION

Article 8
Information reporting by the paying agent
1. Where the beneficial owner is resident in a Member State other than that in which the
paying agent is established, the minimum amount of information to be reported by the
paying agent to the competent authority of its Member State of establishment shall consist
of:
(a) the identity and residence of the beneficial owner established in accordance with Article
3;
(b) the name and address of the paying agent;
(c) the account number of the beneficial owner or, where there is none, identification of the
debt claim giving rise to the interest;
(d) information concerning the interest payment in accordance with paragraph 2.
2. The minimum amount of information concerning interest payment to be reported by the
paying agent shall distinguish between the following categories of interest and indicate:
(a) in the case of an interest payment within the meaning of Article 6
(1)(a): the amount of interest paid or credited;


 

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(b) in the case of an interest payment within the meaning of Article 6
(1)(b) or (d): either the amount of interest or income referred to in those paragraphs or the
full amount of the proceeds from the sale, redemption or refund;
(c) in the case of an interest payment within the meaning of Article 6
(1)(c): either the amount of income referred to in that paragraph or
the full amount of the distribution;
(d) in the case of an interest payment within the meaning of Article 6
(4): the amount of interest attributable to each of the members of the entity referred to in
Article 4(2) who meet the conditions of Articles1(1) and 2(1);
(e) where a Member State exercises the option under Article 6(5): the amount of annualized
interest.
However, Member States may restrict the minimum amount of information concerning
interest payment to be reported by the paying agent to the total amount of interest or
income and to the total amount of the proceeds from sale, redemption or refund.

Article 9
Automatic exchange of information
1. The competent authority of the Member State of the paying agent shall communicate the
information referred to in Article 8 to the competent authority of the Member State of
residence of the beneficial owner.
2. The communication of information shall be automatic and shall take place at least once a
year, within six months following the end of the tax year of the Member State of the paying
agent, for all interest payments made during that year.
3. The provisions of Directive 77/799/EEC shall apply to the exchange of information
under this Directive, provided that the provisions of this Directive do not derogate there
from. However, Article 8 of Directive 77/799/EEC shall not apply to the information to be
provided pursuant to this chapter.

CHAPTER III
TRANSITIONAL PROVISIONS


 

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Article 10
Transitional period
1. During a transitional period starting on the date referred to in
Article 17(2) and (3) and subject to Article 13(1), Belgium,
Luxembourg and Austria shall not be required to apply the provisions of Chapter II.
They shall, however, receive information from the other Member States in accordance with
Chapter II.
During the transitional period, the aim of this Directive shall be to ensure minimum
effective taxation of savings in the form of interest payments made in one Member State to
beneficial owners who are individuals resident for tax purposes in another Member State.
2. The transitional period shall end at the end of the first full fiscal year following the later
of the following dates:
— the date of entry into force of an agreement between the European Community,
following a unanimous decision of the Council, and the last of the Swiss Confederation, the
Principality of Liechtenstein, the Republic of San Marino, the Principality of Monaco and
the Principality of Andorra, providing for the exchange of information upon request as
defined in the OECD Model Agreement on Exchange of Information on Tax Matters
released on 18 April 2002 (hereinafter the ‘OECD Model Agreement’) with respect to
interest payments, as defined in this Directive, made by paying agents established within
their respective territories to beneficial owners resident in the territory to which the
Directive applies, in addition to the simultaneous application by those same countries of a
withholding tax on such payments at the rate defined for the corresponding periods referred
to in Article 11(1),
— the date on which the Council agrees by unanimity that the United States of America is
committed to exchange of information upon request as defined in the OECD Model
Agreement with respect to interest payments, as defined in this directive, made by paying
agents established within its territory to beneficial owners resident in the territory to which
the Directive applies.
3. At the end of the transitional period, Belgium, Luxembourg and Austria shall be required
to apply the provisions of Chapter II and they shall cease to apply the withholding tax and
the revenue sharing provided for in Articles 11 and 12. If, during the transitional period,


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 -
 

Belgium, Luxembourg or Austria elects to apply the provisions of Chapter II, it shall no
longer apply the withholding tax and the revenue sharing provided for in Articles 11 and
12.

Article 11
Withholding tax
1. During the transitional period referred to in Article 10, where the beneficial owner is
resident in a Member State other than that in which the paying agent is established,
Belgium, Luxembourg and Austria shall levy a withholding tax at a rate of 15 % during the
first three years of the transitional period, 20 % for the subsequent three years and 35
%thereafter.
2. The paying agent shall levy withholding tax as follows:
(a) in the case of an interest payment within the meaning of Article 6
(1)(a): on the amount of interest paid or credited;
(b) in the case of an interest payment within the meaning of Article 6
(1)(b) or (d): on the amount of interest or income referred to in those paragraphs or by a
levy of equivalent effect to be borne by the recipient on the full amount of the proceeds of
the sale, redemption or refund;
(c) in the case of an interest payment within the meaning of Article 6
(1)(c): on the amount of income referred to in that paragraph;
(d) in the case of an interest payment within the meaning of Article 6
(4): on the amount of interest attributable to each of the members of the entity referred to in
Article 4(2) who meet the conditions of Articles 1(1) and 2(1);
(e) where a Member State exercises the option under Article 6(5): on the amount of
annualized interest.
3. For the purposes of points (a) and (b) of paragraph 2, withholding tax shall be levied pro
rata to the period of holding of the debt claim by the beneficial owner. When the paying
agent is unable to determine the period of holding on the basis of information in its
possession, it shall treat the beneficial owner as having held the debt claim throughout its
period of existence unless he provides evidence of the date of acquisition.


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4. The imposition of withholding tax by the Member State of the paying agent shall not
preclude the Member State of residence for tax purposes of the beneficial owner from
taxing the income in accordance with its national law, subject to compliance with the
Treaty.
5. During the transitional period, Member States levying withholding tax may provide that
an economic operator paying interest to, or securing interest for, an entity referred to in
Article 4(2) established in another Member State shall be considered the paying agent in
place of the entity and shall levy the withholding tax on that interest, unless the entity has
formally agreed to its name, address and the total amount of interest paid to it or secured for
it being communicated in accordance with the last subparagraph of Article 4(2).

Article 12
Revenue sharing
1. Member States levying withholding tax in accordance with Article11(1) shall retain 25 %
of their revenue and transfer 75 % of the revenue to the Member State of residence of the
beneficial owner of the interest.
2. Member States levying withholding tax in accordance with Article11(5) shall retain 25 %
of the revenue and transfer 75 % to the other Member States proportionate to the transfers
carried out pursuant to paragraph 1 of this Article.
3. Such transfers shall take place at the latest within a period of six months following the
end of the tax year of the Member State of the paying agent in the case of paragraph 1, or
that of the Member State of the economic operator in the case of paragraph 2.
4. Member States levying withholding tax shall take the necessary measures to ensure the
proper functioning of the revenue-sharing system.

Article 13
Exceptions to the withholding tax procedure
1. Member States levying withholding tax in accordance with Article11 shall provide for
one or both of the following procedures in order to ensure that the beneficial owners may
request that no tax be withheld:


 

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(a) a procedure which allows the beneficial owner expressly to authorize the paying agent
to report information in accordance with Chapter II, such authorization covering all interest
paid to the beneficial owner by that paying agent; in such cases, the provisions of Article 9
shall apply;
(b) a procedure which ensures that withholding tax shall not be levied where the beneficial
owner presents to his paying agent a certificate drawn up in his name by the competent
authority of his Member State of residence for tax purposes in accordance with paragraph
2.
2. At the request of the beneficial owner, the competent authority of his Member State of
residence for tax purposes shall issue a certificate indicating:
(a) the name, address and tax or other identification number or, failing such, the date and
place of birth of the beneficial owner;
(b) the name and address of the paying agent;
(c) the account number of the beneficial owner or, where there is none, the identification of
the security.
Such certificate shall be valid for a period not exceeding three years. It shall be issued to
any beneficial owner who requests it, within two months following such request.

Article 14
Elimination of double taxation
1. The Member State of residence for tax purposes of the beneficial owner shall ensure the
elimination of any double taxation which might result from the imposition of the
withholding tax referred to in Article11, in accordance with the provisions of paragraphs 2
and 3.
2. If interest received by a beneficial owner has been subject to withholding tax in the
Member State of the paying agent, the Member State of residence for tax purposes of the
beneficial owner shall grant him a tax credit equal to the amount of the tax withheld in
accordance with its national law. Where this amount exceeds the amount of tax due in
accordance with its national law, the Member State of residence for tax purposes shall
repay the excess amount of tax withheld to the beneficial owner.


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3. If, in addition to the withholding tax referred to in Article 11,interest received by a
beneficial owner has been subject to any other type of withholding tax and the Member
State of residence for tax purposes grants a tax credit for such withholding tax in
accordance with its national law or double taxation conventions, such other withholding tax
shall be credited before the procedure in paragraph 2 is applied.
4. The Member State of residence for tax purposes of the beneficial owner may replace the
tax credit mechanism referred to in paragraphs 2and 3 by a refund of the withholding tax
referred to in Article 11.

Article 15
Negotiable debt securities
1. During the transitional period referred to in Article 10, but until 31
December 2010 at the latest, domestic and international bonds and other negotiable debt
securities which have been first issued before 1 March2001 or for which the original
issuing prospectuses have been approved before that date by the competent authorities
within the meaning of Council Directive 80/390/EEC (1) or by the responsible authorities
in third countries shall not be considered as debt claims within the meaning of Article
6(1)(a), provided that no further issues of such negotiable debt securities are made on or
after 1 March 2002.
However, should the transitional period referred to in Article 10continue beyond 31
December 2010, the provisions of this Articles hall only continue to apply in respect of
such negotiable debt securities:
— which contain gross-up and early redemption clauses and
— where the paying agent as defined in Article 4 is established in a Member State applying
the withholding tax referred to in Article 11and that paying agent pays interest to, or
secures the payment of interest for the immediate benefit of, a beneficial owner resident in
another Member State.
If a further issue is made on or after 1 March 2002 of an aforementioned negotiable debt
security issued by a Government or a related entity acting as a public authority or whose
role is recognized by an international treaty, as defined in the Annex, the entire issue of


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such security, consisting of the original issue and any further issue, shall be considered a
debt claim within the meaning of Article 6(1)(a).
If a further issue is made on or after 1 March 2002 of an aforementioned negotiable debt
security issued by any other issuer not covered by the second subparagraph, such further
issue shall be considered a debt claim within the meaning of Article 6(1)(a).
2. Nothing in this Article shall prevent Member States from taxing the income from the
negotiable debt securities referred to in paragraph 1in accordance with their national laws.

CHAPTER IV
MISCELLANEOUS AND FINAL PROVISIONS
Article 16
Other withholding taxes
This Directive shall not preclude Member States from levying other types of withholding
tax than that referred to in Article 11 in accordance with their national laws or double-
taxation conventions.

Article 17
Transposition
1. Before 1 January 2004 Member States shall adopt and publish the laws, regulations and
administrative provisions necessary to comply with this Directive. They shall forthwith
inform the Commission thereof.
2. Member States shall apply these provisions from ►M2 1 July2005 ◄ provided that:
(i) the Swiss Confederation, the Principality of Liechtenstein, the Republic of San Marino,
the Principality of Monaco and the Principality of Andorra apply from that same date
measures equivalent to those contained in this Directive, in accordance with agreements
entered into by them with the European Community, following unanimous decisions of the
Council;
(ii) all agreements or other arrangements are in place, which provide that all the relevant
dependent or associated territories (the Channel Islands, the Isle of Man and the dependent
or associated territories in the Caribbean) apply from that same date automatic exchange of
information in the same manner as is provided for in Chapter II of this Directive, (or,


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-

during the transitional period defined in Article10, apply a withholding tax on the same
terms as are contained in Articles 11 and 12).
3. The Council shall decide, by unanimity, at least six months before1 January 2005,
whether the condition set out in paragraph 2 will be met, having regard to the dates of entry
into force of the relevant measures in the third countries and dependent or associated
territories concerned. If the Council does not decide that the condition will be met, it shall,
acting unanimously on a proposal by the Commission, adopt anew date for the purposes of
paragraph 2.
4. When Member States adopt the provisions necessary to comply with this Directive, they
shall contain a reference to this Directive or be accompanied by such a reference on the
occasion of their official publication. Member States shall determine how such reference is
to be made.
5. Member States shall forthwith inform the Commission thereof and communicate to the
Commission the main provisions of national law which they adopt in the field covered by
this Directive and a correlation table between this Directive and the national provisions
adopted.

Article 18
Review
The Commission shall report to the Council every three years on the operation of this
Directive. On the basis of these reports, the Commission shall, where appropriate, propose
to the Council any amendments to the Directive that prove necessary in order better to
ensure effective taxation of savings income and to remove undesirable distortions of
competition.

Article 19
Entry into force
This Directive shall enter into force on the 20th day following that of its publication in the
Official Journal of the European Union.

Article 20


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Addressees
This Directive is addressed to the Member States.


 

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Annex
7
OECD
Model
Agreement
on
Information
Exchange



 - XXXI 


 -
 

 AGREEMENT ON EXCHANGE OF
INFORMATION ON TAX MATTERS
 AGREEMENT ON EXCHANGE OF INFORMATION ON TAX MATTERS

I. INTRODUCTION

1. The purpose of this Agreement is to promote international co-operation in tax matters through
exchange of information.

2. The Agreement was developed by the OECD Global Forum Working Group on Effective
Exchange of Information (“the Working Group”). The Working Group consisted of representatives from
OECD Member countries as well as delegates from Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus,
Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino.

3. The Agreement grew out of the work undertaken by the OECD to address harmful tax practices.
See the 1998 OECD Report “Harmful Tax Competition: An Emerging Global Issue” (the “1998 Report”).
The 1998 Report identified “the lack of effective exchange of information” as one of the key criteria in
determining harmful tax practices. The mandate of the Working Group was to develop a legal instrument
that could be used to establish effective exchange of information. The Agreement represents the standard
of effective exchange of information for the purposes of the OECD’s initiative on harmful tax practices.

4. This Agreement is not a binding instrument but contains two models for bilateral agreements
drawn up in the light of the commitments undertaken by the OECD and the committed jurisdictions. In this
context, it is important that financial centres throughout the world meet the standards of tax information
exchange set out in this document. As many economies as possible should be encouraged to co-operate in
this important endeavour. It is not in the interest of participating economies that the implementation of the
standard contained in the Agreement should lead to the migration of business to economies that do not co-
operate in the exchange of information. To avoid this result requires measures to defend the integrity of tax
systems against the impact of a lack of co-operation in tax information exchange matters. The OECD
members and committed jurisdictions have to engage in an ongoing dialogue to work towards
implementation of the standard. An adequate framework will be jointly established by the OECD and the
committed jurisdictions for this purpose particularly since such a framework would help to achieve a level
playing field where no party is unfairly disadvantaged.

5. The Agreement is presented as both a multilateral instrument and a model for bilateral treaties or
agreements. The multilateral instrument is not a “multilateral” agreement in the traditional sense. Instead,
it provides the basis for an integrated bundle of bilateral treaties. A Party to the multilateral Agreement
would only be bound by the Agreement vis- à-vis the specific parties with which it agrees to be bound.
Thus, a party wishing to be bound by the multilateral Agreement must specify in its instrument of
ratification, approval or acceptance the party or parties vis-à-vis which it wishes to be so bound. The
Agreement then enters into force, and creates rights and obligations, only as between those parties that
have mutually identified each other in their instruments of ratification, approval or acceptance that have
been deposited with the depositary of the Agreement. The bilateral version is intended to serve as a model
for bilateral exchange of information agreements. As such, modifications to the text may be agreed in
bilateral agreements to implement the standard set in the model.
6. As mentioned above, the Agreement is intended to establish the standard of what constitutes
effective exchange of information for the purposes of the OECD’s initiative on harmful tax practices.
However, the purpose of the Agreement is not to prescribe a specific format for how this standard should
be achieved. Thus, the Agreement in either of its forms is only one of several ways in which the standard
can be implemented. Other instruments, including double taxation agreements, may also be used provided
both parties agree to do so, given that other instruments are usually wider in scope.

7. For each Article in the Agreement there is a detailed commentary intended to illustrate or
interpret its provisions. The relevance of the Commentary for the interpretation of the Agreement is
determined by principles of international law. In the bilateral context, parties wishing to ensure that the
Commentary is an authoritative interpretation might insert a specific reference to the Commentary in the
text of the exchange instrument, for instance in the provision equivalent to Article 4, paragraph 2.
 II. TEXT OF THE AGREEMENT

MULTILATERAL VERSION BILATERAL VERSION

The Parties to this Agreement, desiring The government of _______ and the
to facilitate the exchange of information with government of ______, desiring to facilitate the
respect to taxes have agreed as follows: exchange of information with respect to taxes
have agreed as follows:

Article 1
Object and Scope of the Agreement
The competent authorities of the Contracting Parties shall provide assistance through exchange of
information that is foreseeably relevant to the administration and enforcement of the domestic laws of the
Contracting Parties concerning taxes covered by this Agreement. Such information shall include
information that is foreseeably relevant to the determination, assessment and collection of such taxes, the
recovery and enforcement of tax claims, or the investigation or prosecution of tax matters. Information
shall be exchanged in accordance with the provisions of this Agreement and shall be treated as confidential
in the manner provided in Article 8. The rights and safeguards secured to persons by the laws or
administrative practice of the requested Party remain applicable to the extent that they do not unduly
prevent or delay effective exchange of information.

Article 2

Jurisdiction

A Requested Party is not obligated to provide information which is neither held by its authorities nor in the
possession or control of persons who are within its territorial jurisdiction.

Article 3
Taxes Covered
MULTILATERAL VERSION BILATERAL VERSION

1. This Agreement shall apply: 1. The taxes which are the subject of this
Agreement are:
a) to the following taxes imposed by or on
behalf of a Contracting Party:

i) taxes on income or profits; a) in country A, _______________________;

ii) taxes on capital;

 iii) taxes on net wealth; b) in country B, ______________________.

iv) estate, inheritance or gift taxes;

b) to the taxes in categories referred to in 2. This Agreement shall also apply to

subparagraph a) above, which are imposed by any identical taxes imposed after the date of
or on behalf of political sub-divisions or local signature of the Agreement in addition to or in
authorities of the Contracting Parties if listed in place of the existing taxes. This Agreement
the instrument of ratification, acceptance or shall also apply to any substantially similar
approval. taxes imposed after the date of signature of the
Agreement in addition to or in place of the
2. The Contracting Parties, in their existing taxes if the competent authorities of the
instruments of ratification, acceptance or Contracting Parties so agree. Furthermore, the
approval, may agree that the Agreement shall taxes covered may be expanded or modified by
also apply to indirect taxes. mutual agreement of the Contracting Parties in
the form of an exchange of letters. The
3. This Agreement shall also apply to competent authorities of the Contracting Parties
any identical taxes imposed after the date of shall notify each other of any substantial
entry into force of the Agreement in addition to changes to the taxation and related information
or in place of the existing taxes. This gathering measures covered by the Agreement.
Agreement shall also apply to any substantially
similar taxes imposed after the date of entry into
force of the Agreement in addition to or in place
of the existing taxes if the competent authorities
of the Contracting Parties so agree.
Furthermore, the taxes covered may be
expanded or modified by mutual agreement of
the Contracting Parties in the form of an
exchange of letters. The competent authorities
of the Contracting Parties shall notify each other
of any substantial changes to the taxation and
related information gathering measures covered
by the Agreement.

Article 4
Definitions
MULTILATERAL VERSION BILATERAL VERSION

1. For the purposes of this Agreement, unless otherwise defined:

a) the term “Contracting Party” means a) the term “Contracting Party” means country
any party that has deposited an instrument of A or country B as the context requires;
ratification, acceptance or approval with the
depositary;

b) the term “competent authority” means b) the term “competent authority” means
the authorities designated by a Contracting
Party in its instrument of acceptance, i) in the case of Country A,
ratification or approval; _______________;
 ii) in the case of Country B,
_______________;

c) the term “person” includes an individual, a company and any other body of persons;

d) the term “company” means any body corporate or any entity that is treated as a body corporate for tax
purposes;

e) the term “publicly traded company” means any company whose principal class of shares is listed on a
recognised stock exchange provided its listed shares can be readily purchased or sold by the public.
Shares can be purchased or sold “by the public” if the purchase or sale of shares is not implicitly or
explicitly restricted to a limited group of investors;

f) the term “principal class of shares” means the class or classes of shares representing a majority of the
voting power and value of the company;

g) the term “recognised stock exchange” means any stock exchange agreed upon by the competent
authorities of the Contracting Parties;

h) the term “collective investment fund or scheme” means any pooled investment vehicle, irrespective of
legal form. The term “public collective investment fund or scheme” means any collective investment
fund or scheme provided the units, shares or other interests in the fund or scheme can be readily
purchased, sold or redeemed by the public. Units, shares or other interests in the fund or scheme can be
readily purchased, sold or redeemed “by the public” if the purchase, sale or redemption is not
implicitly or explicitly restricted to a limited group of investors;

i) the term “tax” means any tax to which the Agreement applies;

j) the term “applicant Party” means the Contracting Party requesting information;

k) the term “requested Party” means the Contracting Party requested to provide information;

l) the term “information gathering measures” means laws and administrative or judicial procedures that
enable a Contracting Party to obtain and provide the requested information;

m) the term “information” means any fact, statement or record in any form whatever;

n) the term “depositary” means the Secretary- This paragraph would not be necessary
General of the Organisation for Economic
Co-operation and Development;

o) the term “criminal tax matters” means tax matters involving intentional conduct which is liable to
prosecution under the criminal laws of the applicant Party;

p) the term “ criminal laws” means all criminal laws designated as such under domestic law irrespective of
whether contained in the tax laws, the criminal code or other statutes.

2. As regards the application of this Agreement at any time by a Contracting Party, any term not
defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under
the law of that Party, any meaning under the applicable tax laws of that Party prevailing over a meaning
given to the term under other laws of that Party.

Article 5
Exchange of Information Upon Request
1. The competent authority of the requested Party shall provide upon request information for the
purposes referred to in Article 1. Such information shall be exchanged without regard to whether the
conduct being investigated would constitute a crime under the laws of the requested Party if such conduct
occurred in the requested Party.

2. If the information in the possession of the competent authority of the requested Party is not
sufficient to enable it to comply with the request for information, that Party shall use all relevant
information gathering measures to provide the applicant Party with the information requested,
notwithstanding that the requested Party may not need such information for its own tax purposes.

3. If specifically requested by the competent authority of an applicant Party, the competent authority
of the requested Party shall provide information under this Article, to the extent allowable under its
domestic laws, in the form of depositions of witnesses and authenticated copies of original records.

4. Each Contracting Party shall ensure that its competent authorities for the purposes specified in
Article 1 of the Agreement, have the authority to obtain and provide upon request:

a) information held by banks, other financial institutions, and any person acting in an agency or
fiduciary capacity including nominees and trustees;

b) information regarding the ownership of companies, partnerships, trusts, foundations,

“Anstalten” and other persons, including, within the constraints of Article 2, ownership information on all
such persons in an ownership chain; in the case of trusts, information on settlors, trustees and beneficiaries;
and in the case of foundations, information on founders, members of the foundation council and
beneficiaries. Further, this Agreement does not create an obligation on the Contracting Parties to obtain or
provide ownership information with respect to publicly traded companies or public collective investment
funds or schemes unless such information can be obtained without giving rise to disproportionate
difficulties.

5. The competent authority of the applicant Party shall provide the following information to the
competent authority of the requested Party when making a request for information under the Agreement to
demonstrate the foreseeable relevance of the information to the request:

(a) the identity of the person under examination or investigation;

(b) a statement of the information sought including its nature and the form in which the applicant
Party wishes to receive the information from the requested Party;

(c) the tax purpose for which the information is sought;

(d) grounds for believing that the information requested is held in the requested Party or is in the
possession or control of a person within the jurisdiction of the requested Party;

(e) to the extent known, the name and address of any person believed to be in possession of the
requested information;
 (f) a statement that the request is in conformity with the law and administrative practices of the
applicant Party, that if the requested information was within the jurisdiction of the applicant Party then the
competent authority of the applicant Party would be able to obtain the information under the laws of the
applicant Party or in the normal course of administrative practice and that it is in conformity with this
Agreement;

(g) a statement that the applicant Party has pursued all means available in its own territory to
obtain the information, except those that would give rise to disproportionate difficulties.

6. The competent authority of the requested Party shall forward the requested information as
promptly as possible to the applicant Party. To ensure a prompt response, the competent authority of the
requested Party shall:

a) Confirm receipt of a request in writing to the competent authority of the applicant Party and shall
notify the competent authority of the applicant Party of deficiencies in the request, if any, within 60
days of the receipt of the request.

b) If the competent authority of the requested Party has been unable to obtain and provide the
information within 90 days of receipt of the request, including if it encounters obstacles in furnishing
the information or it refuses to furnish the information, it shall immediately inform the applicant
Party, explaining the reason for its inability, the nature of the obstacles or the reasons for its refusal.

Article 6

Tax Examinations Abroad

MULTILATERAL VERSION BILATERAL VERSION

1. A Contracting Party may allow 1. A Contracting Party may allow

representatives of the competent authority of
another Contracting Party to enter the territory
of the first-mentioned Party to interview
individuals and examine records with the
written consent of the persons concerned. The
competent authority of the second-mentioned
Party shall notify the competent authority of the
first-mentioned Party of the time and place of
the meeting with the individuals concerned.
representatives of the competent authority of the
other Contracting Party to enter the territory of
the first-mentioned Party to interview
individuals and examine records with the
written consent of the persons concerned. The
competent authority of the second-mentioned
Party shall notify the competent authority of the
first-mentioned Party of the time and place of
the meeting with the individuals concerned.

2. At the request of the competent 2. At the request of the competent

authority of a Contracting Party, the competent
authority of another Contracting Party may
allow representatives of the competent authority
of the first-mentioned Party to be present at the
appropriate part of a tax examination in the
second-mentioned Party.
authority of one Contracting Party, the
competent authority of the other Contracting
Party may allow representatives of the
competent authority of the first-mentioned Party
to be present at the appropriate part of a tax
examination in the second-mentioned Party.

3. If the request referred to in paragraph 3. If the request referred to in paragraph

2 is acceded to, the competent authority of the
Contracting Party conducting the examination
shall, as soon as possible, notify the competent
authority of the other Party about the time and
place of the examination, the authority or
official designated to carry out the examination
and the procedures and conditions required by
the first-mentioned Party for the conduct of the
examination. All decisions with respect to the
conduct of the tax examination shall be made by
the Party conducting the examination.
2 is acceded to, the competent authority of the
Contracting Party conducting the examination
shall, as soon as possible, notify the competent
authority of the other Party about the time and
place of the examination, the authority or
official designated to carry out the examination
and the procedures and conditions required by
the first-mentioned Party for the conduct of the
examination. All decisions with respect to the
conduct of the tax examination shall be made by
the Party conducting the examination.

Article 7
Possibility of Declining a Request

1. The requested Party shall not be required to obtain or provide information that the applicant Party
would not be able to obtain under its own laws for purposes of the administration or enforcement of its
own tax laws. The competent authority of the requested Party may decline to assist where the request is not
made in conformity with this Agreement.

2. The provisions of this Agreement shall not impose on a Contracting Party the obligation to
supply information which would disclose any trade, business, industrial, commercial or professional secret
or trade process. Notwithstanding the foregoing, information of the type referred to in Article 5, paragraph
4 shall not be treated as such a secret or trade process merely because it meets the criteria in that paragraph.

3. The provisions of this Agreement shall not impose on a Contracting Party the obligation to obtain
or provide information, which would reveal confidential communications between a client and an attorney,
solicitor or other admitted legal representative where such communications are:

(a) produced for the purposes of seeking or providing legal advice or

(b) produced for the purposes of use in existing or contemplated legal proceedings.

4. The requested Party may decline a request for information if the disclosure of the information
would be contrary to public policy (ordre public).

5. A request for information shall not be refused on the ground that the tax claim giving rise to the
request is disputed.

6. The requested Party may decline a request for information if the information is requested by the
applicant Party to administer or enforce a provision of the tax law of the applicant Party, or any
requirement connected therewith, which discriminates against a national of the requested Party as
compared with a national of the applicant Party in the same circumstances.

Article 8
Confidentiality
Any information received by a Contracting Party under this Agreement shall be treated as confidential and
may be disclosed only to persons or authorities (including courts and administrative bodies) in the
jurisdiction of the Contracting Party concerned with the assessment or collection of, the enforcement or
prosecution in respect of, or the determination of appeals in relation to, the taxes covered by this
Agreement. Such persons or authorities shall use such information only for such purposes. They may
disclose the information in public court proceedings or in judicial decisions. The information may not be
disclosed to any other person or entity or authority or any other jurisdiction without the express written
consent of the competent authority of the requested Party.

Article 9
Costs
Incidence of costs incurred in providing assistance shall be agreed by the Contracting Parties.

Article 10
Implementation Legislation
The Contracting Parties shall enact any legislation necessary to comply with, and give effect to,
the terms of the Agreement.

Article 11
Language

This article may not be required.

Requests for assistance and answers

thereto shall be drawn up in English, French or
any other language agreed bilaterally between
the competent authorities of the Contracting
Parties under Article 13.

Article 12
Other international agreements or arrangements
This article may not be required
The possibilities of assistance
provided by this Agreement do not limit, nor are
they limited by, those contained in existing
international agreements or other arrangements
between the Contracting Parties which relate to
co-operation in tax matters.

Article 13
Mutual Agreement Procedure
1. Where difficulties or doubts arise
between two or more Contracting Parties
regarding the implementation or interpretation
of the Agreement, the competent authorities of
those Contracting Parties shall endeavour to
resolve the matter by mutual agreement.
1. Where difficulties or doubts arise
between the Contracting Parties regarding the
implementation or interpretation of the
Agreement, the competent authorities shall
endeavour to resolve the matter by mutual
agreement.

2. In addition to the agreements referred 2. In addition to the agreements referred

to in paragraph 1, the competent authorities of
two or more Contracting Parties may mutually
agree:
a) on the procedures to be used under
Articles 5 and 6;
to in paragraph 1, the competent authorities of
the Contracting Parties may mutually agree on
the procedures to be used under Articles 5 and
6.

b) on the language to be used in making

and responding to requests in
accordance with Article 11.

3. The competent authorities of the Contracting Parties may communicate with each other
directly for purposes of reaching agreement under this Article.

4. Any agreement between the 4. The paragraph would not be

competent authorities of two or more necessary.
Contracting Parties shall be effective only
between those Contracting Parties.

5. The Contracting Parties may also agree on other forms of dispute resolution.

Article 14
The article would be unnecessary
Depositary’s functions

1. The depositary shall notify all

Contracting Parties of:

a. the deposit of any instrument of

ratification, acceptance or approval of
this Agreement;

b. any date of entry into force of this

Agreement in accordance with the
provisions of Article 15;

c. any notification of termination of this

Agreement;

d. any other act or notification relating

 to this Agreement.

2. At the request of one or more of the

competent authorities of the Contracting Parties,
the depositary may convene a meeting of the
competent authorities or their representatives, to
discuss significant matters related to
interpretation or implementation of the
Agreement.

Article 15

Entry into Force

1. This Agreement is subject to 1. This Agreement is subject to ratification,

ratification, acceptance or approval. acceptance or approval by the Contracting
Instruments of ratification, acceptance or Parties, in accordance with their respective
approval shall be submitted to the depositary of laws. Instruments of ratification, acceptance or
this Agreement. approval shall be exchanged as soon as
possible.

2. This Agreement shall enter into force on 1

2. Each Contracting Party shall specify
in its instrument of ratification, acceptance or
approval vis-à-vis which other party it wishes to
be bound by this Agreement. The Agreement
shall enter into force only between Contracting
Parties that specify each other in their respective
instruments of ratification, acceptance or
approval.
January 2004 with respect to exchange of
information for criminal tax matters. The
Agreement shall enter into force on 1 January
2006 with respect to all other matters covered in
Article 1.

3. This Agreement shall enter into force on 1

January 2004 with respect to exchange of
information for criminal tax matters. The
Agreement shall enter into force on 1 January
2006 with respect to all other matters covered in
Article 1.

For each party depositing an instrument after

such entry into force, the Agreement shall enter
into force on the 30th day following the deposit
of both instruments.

4. Unless an earlier date is agreed by the 3. The provisions of this Agreement shall have
Contracting Parties, the provisions of this effect:
Agreement shall have effect
- with respect to criminal tax matters for taxable
- with respect to criminal tax matters for tax
able periods beginning on or after 1 January
2004 or, where there is no taxable period, for
all charges to tax arising on or after 1 January
2004;
- with respect to all other matters described in
Article 1 for all taxable periods beginning on or
after January 1 2006 or, where there is no
taxable period, for all charges to tax arising on
or after 1 January 2006.
In cases addressed in the third sentence of
paragraph 3, the Agreement shall take effect for
all taxable periods beginning on or after the
sixtieth day following entry into force, or where
there is no taxable period for all charges to tax
arising on or after the sixtieth day following
entry into force.
Article 16
Termination
1. Any Contracting Party may terminate
this Agreement vis-à-vis any other Contracting
Party by serving a notice of termination either
through diplomatic channels or by letter to the
competent authority of the other Contracting
Party. A copy shall be provided to the
depositary of the Agreement.
2. Such termination shall become
effective on the first day of the month following
the expiration of a period of six months after the
date of receipt of the notification by the
depositary.
3. Any Contracting Party that terminates
the Agreement shall remain bound by the
provisions of Article 8 with respect to any
information obtained under the Agreement.
III.
periods beginning on or after 1 January 2004 or,
where there is no taxable period, for all charges
to tax arising on or after 1 January 2004;
-with respect to all other matters described in
Article 1 for all taxable periods beginning on or
after January 1 2006 or, where there is no
taxable period, for all charges to tax arising on
or after 1 January 2006.
Termination
1. Either Contracting Party may
terminate the Agreement by serving a notice of
termination either through diplomatic channels
or by letter to the competent authority of the
other Contracting Party.
2. Such termination shall become
effective on the first day of the month following
the expiration of a period of six months after the
date of receipt of notice of termination by the
other Contracting Party.
3. A Contracting Party that terminates
the Agreement shall remain bound by the
provisions of Article 8 with respect to any
information obtained under the Agreement.
In witness whereof, the undersigned, being duly
authorised thereto, have signed the Agreement.
COMMENTARY
 Title and Preamble

1. The preamble sets out the general objective of the Agreement. The objective of the Agreement is
to facilitate exchange of information between the parties to the Agreement. The multilateral and the
bilateral versions of the preamble are identical except that the multilateral version refers to the signatories
of the Agreement as “Parties” and the bilateral version refers to the signatories as the “Government of
______.” The formulation “Government of _____” in the bilateral context is used for illustrative purposes
only and countries are free to use other wording in accordance with their domestic requirements or
practice.

Article 1 (Object and Scope of Agreement)

2. Article 1 defines the scope of the Agreement, which is the provision of assistance in tax matters
through exchange of information that will assist the Contracting Parties to administer and enforce their tax
laws.

3. The Agreement is limited to exchange of information that is foreseeably relevant to the

administration and enforcement of the laws of the applicant Party concerning the taxes covered by the
Agreement. The standard of foreseeable relevance is intended to provide for exchange of information in
tax matters to the widest possible extent and, at the same time, to clarify that Contracting Parties are not at
liberty to engage in fishing expeditions or to request information that is unlikely to be relevant to the tax
affairs of a given taxpayer. Parties that choose to enter into bilateral agreements based on the Agreement
may agree to an alternative formulation of this standard, provided that such alternative formulation is
consistent with the scope of the Agreement.

4. The Agreement uses the standard of foreseeable relevance in order to ensure that information
requests may not be declined in cases where a definite assessment of the pertinence of the information to
an on-going investigation can only be made following the receipt of the information. The standard of
foreseeable relevance is also used in the Joint Council of Europe/OECD Convention on Mutual
Administrative Assistance in Tax Matters.

5. The last sentence of Article 1 ensures that procedural rights existing in the requested Party will
continue to apply to the extent they do not unduly prevent or delay effective exchange of information. Such
rights may include, depending on the circumstances, a right of notification, a right to challenge the
exchange of information following notification or rights to challenge information gathering measures taken
by the requested Party. Such procedural rights and safeguards also include any rights secured to persons
that may flow from relevant international agreements on human rights and the expression “unduly prevent
or delay” indicates that such rights may take precedence over the Agreement.

6. Article 1 strikes a balance between rights granted to persons in the requested Party and the need
for effective exchange of information. Article 1 provides that rights and safeguards are not overridden
simply because they could, in certain circumstances, operate to prevent or delay effective exchange of
information. However, Article 1 obliges the requested Party to ensure that any such rights and safeguards
are not applied in a manner that unduly prevents or delays effective exchange of information. For instance,
a bona fide procedural safeguard in the requested Party may delay a response to an information request.
However, such a delay should not be considered as “unduly preventing or delaying ” effective exchange of
information unless the delay is such that it calls into question the usefulness of the information exchange
agreement for the applicant Party. Another example may concern notification requirements. A requested
Party whose laws require prior notification is obliged to ensure that its notification requirements are not
applied in a manner that, in the particular circumstances of the request, would frustrate the efforts of the
party seeking the information. For instance, notification rules should permit exceptions from prior
notification (e.g., in cases in which the information request is of a very urgent nature or the notification is
likely to undermine the chance of success of the investigation conducted by the applicant Party). To avoid
future difficulties or misunderstandings in the implementation of an agreement, the Contracting Parties
should consider discussing these issues in detail during negotiations and in the course of implementing the
agreement in order to ensure that information requested under the agreement can be obtained as
expeditiously as possible while ensuring adequate protection of taxpayers’ rights.

Article 2 (Jurisdiction)

7. Article 2 addresses the jurisdictional scope of the Agreement. It clarifies that a requested Party is
not obligated to provide information which is neither held by its authorities nor is in the possession or
control of persons within its territorial jurisdiction. The requested Party’s obligation to provide information
is not, however, restricted by the residence or the nationality of the person to whom the information relates
or by the residence or the nationality of the person in control or possession of the information requested.
The term “possession or control” should be construed broadly and the term “authorities” should be
interpreted to include all government agencies. Of course, a requested Party would nevertheless be under
no obligation to provide information held by an “authority” if the circumstances described in Article 7
(Possibility of Declining a Request) were met.

Article 3 (Taxes Covered)

Paragraph 1

8. Article 3 is intended to identify the taxes with respect to which the Contracting Parties agree to
exchange information in accordance with the provisions of the Agreement. Article 3 appears in two
versions: a multilateral version and a bilateral version. The multilateral Agreement applies to taxes on
income or profits, taxes on capital, taxes on net wealth, and estate, inheritance or gift taxes. “Taxes on
income or profits” includes taxes on gains from the alienation of movable or immovable property. The
multilateral Agreement, in sub-paragraph b), further permits the inclusion of taxes imposed by or on behalf
of political sub-divisions or local authorities. Such taxes are covered by the Agreement only if they are
listed in the instrument of ratification, approval or acceptance.

9. Bilateral agreements will cover, at a minimum, the same four categories of direct taxes (i.e.,
taxes on income or profits, taxes on capital, taxes on net wealth, and estate, inheritance or gift taxes) unless
both parties agree to waive one or more of them. A Contracting Party may decide to omit any or all of the
four categories of direct taxes from its list of taxes to be covered but it would nevertheless be obligated to
respond to requests for information with respect to the taxes listed by the other Contracting Party
(assuming the request otherwise satisfies the terms of the Agreement). The Contracting Parties may also
agree to cover taxes other than the four categories of direct taxes. For example, Contracting Party A may
list all four direct taxes and Contracting Party B may list only indirect taxes. Such an outcome is likely
where the two Contracting Parties have substantially different tax regimes.
Paragraph 2

10. Paragraph 2 of the multilateral version provides that the Contracting Parties may agree to extend
the Agreement to cover indirect taxes. This possible extension is consistent with Article 26 of the OECD
Model Convention on Income and on Capital, which now covers “taxes of every kind and description.”
There is no equivalent to paragraph 2 in the bilateral version because the issue can be addressed under
paragraph 1. Any agreement to extend the Agreement to cover indirect taxes should be notified to the
depositary. Paragraph 2 of the bilateral version is discussed below together with paragraph 3 of the
multilateral version.

Paragraph 3

11. Paragraph 3 of the multilateral version and paragraph 2 of the bilateral version address “identical
taxes”, “substantially similar taxes” and further contain a rule on the expansion or modification of the taxes
covered by the Agreement. The Agreement applies automatically to all “identical taxes”. The Agreement
applies to “substantially similar taxes” if the competent authorities so agree. Finally, the taxes covered by
the Agreement can be expanded or modified if the Contracting Parties so agree.

12. The only difference between paragraph 3 of the multilateral version and paragraph 2 of the
bilateral version is that the former refers to the date of entry into force whereas the later refers to the date
of signature. The multilateral version refers to entry into force because in the multilateral context there
might be no official signing of the Agreement between the Contracting Parties.

13. In the multilateral context the first sentence of paragraph 3 is of a declaratory nature only. The
multilateral version lists the taxes by general type. Any tax imposed after the date of signature or entry into
force of the Agreement that is of such a type is already covered by operation of paragraph 1. The same
holds true in the bilateral context, if the Contracting Parties choose to identify the taxes by general type.
Certain Contracting Parties, however, may wish to identify the taxes to which the Agreement applies by
specific name (e.g., the Income Tax Act of 1999). In these cases, the first sentence makes sure that the
Agreement also applies to taxes that are identical to the taxes specifically identified.

14. The meaning of “identical” should be construed very broadly. For instance, any replacement tax
of an existing tax that does not change the nature of the tax should be considered an “identical” tax.
Contracting Parties seeking to avoid any uncertainty regarding the interpretation of “identical” versus
“substantially similar” may wish to delete the second sentence and to include substantially similar taxes
within the first sentence.

Article 4 (Definitions)

Paragraph 1

15. Article 4 contains the definitions of terms for purposes of the Agreement. Article 4, paragraph 1,
sub-paragraph a) defines the term “Contracting Party”. Sub-paragraph b) defines the term “competent
authority.” The definition recognises that in some Contracting Parties the execution of the Agreement may
not fall exclusively within the competence of the highest tax authorities and that some matters may be
reserved or may be delegated to other authorities. The definition enables each Contracting Party to
designate one or more authorities as being competent to execute the Agreement. While the definition
provides the Contracting Parties with the possibility of designating more than one competent authority (for
instance, where Contracting Parties agree to cover both direct and indirect taxes), it is customary practice
to have only one competent authority per Contracting Party.
16. Sub-paragraph c) defines the meaning of “person” for purposes of the Agreement. The definition
of the term “person” given in sub-paragraph c) is intended to be very broad. The definition explicitly
mentions an individual, a company and any other body of persons. However, the use of the word
”includes” makes clear that the Agreement also covers any other organisational structures such as trusts,
foundations, “Anstalten,” partnerships as well as collective investment funds or schemes.

17. Foundations, “Anstalten” and similar arrangements are covered by this Agreement irrespective
of whether or not they are treated as an “entity that is treated as a body corporate for tax purposes” under
sub-paragraph d).

18. Trusts are also covered by this Agreement. Thus, competent authorities of the Contracting Parties
must have the authority to obtain and provide information on trusts (such as the identity of settlors,
beneficiaries or trustees) irrespective of the classification of trusts under their domestic laws.

19. The main example of a “body of persons” is the partnership. In addition to partnerships, the term
“body of persons” also covers less commonly used organisational structures such as unincorporated
associations.

20. In most cases, applying the definition should not raise significant issues of interpretation.
However, when applying the definition to less commonly used organisational structures, interpretation may
prove more difficult. In these cases, particular attention must be given to the context of the Agreement. Cf.
Article 4, paragraph 2. The key operational article that uses the term “person” is Article 5, paragraph 4,
sub-paragraph b), which provides that a Contracting Party must have the authority to obtain and provide
ownership information for all “persons” within the constraints of Article 2. Too narrow an interpretation
may jeopardise the object and purposes of the Agreement by potentially excluding certain entities or other
organisational structures from this obligation simply as a result of certain corporate or other legal features.
Therefore, the aim is to cover all possible organisational structures.

21. For instance an “estate” is recognised as a distinct entity under the laws of certain countries. An
“estate” typically denotes property held under the provisions of a will by a fiduciary (and under the
direction of a court) whose duty it is to preserve and protect such property for distribution to the
beneficiaries. Similarly a legal system might recognise an organisational structure that is substantially
similar to a trust or foundation but may refer to it by a different name. The standard of Article 4,
paragraph 2 makes clear that where these arrangements exist under the applicable law they constitute
“persons” under the definition of sub-paragraph c).

22. Sub-paragraph d) provides the definition of company and is identical to Article 3, paragraph 1
sub-paragraph b) of the OECD Model Convention on Income and on Capital.

23. Sub-paragraphs e) through h) define “publicly traded company” and “ collective investment fund
or scheme.” Both terms are used in Article 5 paragraph 4, sub-paragraph b). Sub-paragraphs e) through g)
contain the definition of publicly traded company and sub-paragraph h) addresses collective investment
funds or schemes.

24. For reasons of simplicity the definitions do not require a minimum percentage of interests traded
(e.g., 5 percent of all outstanding shares of a publicly listed company) but somewhat more broadly require
that equity interests must be “readily” available for sale, purchase or redemption. The fact that a collective
investment fund or scheme may operate in the form of a publicly traded company should not raise any
issues because the definitions for both publicly traded company and collective investment fund or scheme
are essentially identical.
25. Sub-paragraph e) provides that a “publicly traded company” is any company whose principal
class of shares is listed on a recognised stock exchange and whose listed shares can be readily sold or
purchased by the public. The term “principal class of shares” is defined in sub-paragraph f). The definition
ensures that companies that only list a minority interest do not qualify as publicly traded companies. A
publicly traded company can only be a company that lists shares representing both a majority of the voting
rights and a majority of the value of the company.

26. The term “recognised stock exchange” is defined in sub-paragraph g) as any stock exchange
agreed upon by the competent authorities. One criterion competent authorities might consider in this
context is whether the listing rules, including the wider regulatory environment, of any given stock
exchange contain sufficient safeguards against private limited companies posing as publicly listed
companies. Competent authorities might further explore whether there are any regulatory or other
requirements for the disclosure of substantial interests in any publicly listed company.

27. The term “by the public” is defined in the second sentence of sub-paragraph e). The definition
seeks to ensure that share ownership is not restricted to a limited group of investors. Examples of cases in
which the purchase or sale of shares is restricted to a limited group of investors would include the
following situations: shares can only be sold to existing shareholders, shares are only offered to members
of a family or to related group companies, shares can only be bought by members of an investment club, a
partnership or other association.

28. Restrictions on the free transferability of shares that are imposed by operation of law or by a
regulatory authority or are conditional or contingent upon market related events are not restrictions that
limit the purchase or sale of shares to a “limited group of investors”. By way of example, a restriction on
the free transferability of shares of a corporate entity that is triggered by attempts by a group of investors or
non-investors to obtain control of a company is not a restriction that limits the purchase or sale of shares to
a “limited group of investors”.

29. The insertion of “readily” reflects the fact that where shares do not change hands to any relevant
degree the rationale for the special mention of publicly traded companies in Article 5, paragraph 4, sub-
paragraph b) does not apply. Thus, for a publicly traded company to meet this standard, more than a
negligible portion of its listed shares must actually be traded.

30. Sub-paragraph h) defines a collective investment fund or scheme as any pooled investment
vehicle irrespective of legal form. The definition includes collective investment funds or schemes
structured as companies, partnerships, trusts as well as purely contractual arrangements. Sub-paragraph h)
then defines “public collective investment funds or schemes” as any collective investment fund or scheme
where the interests in the vehicle can be readily purchased, sold, or redeemed by the public. The terms
“readily” and “by the public” have the same meaning that they have in connection with the definition of
publicly traded companies.

31. Sub-paragraphs i, j) and k) are self-explanatory.

32. Sub-paragraph l) defines “information gathering measures.” Each Contracting Party determines
the form of such powers and the manner in which they are implemented under its internal law. Information
gathering measures typically include requiring the presentation of records for examination, gaining direct
access to records, making copies of such records and interviewing persons having knowledge, possession,
control or custody of pertinent information. Information gathering measures will typically focus on
obtaining the requested information and will in most cases not themselves address the provision of the
information to the applicant Party.
33. Sub-paragraph m) defines “information”. The definition is very broad and includes any fact,
statement or record in any form whatever. “Record” includes (but is not limited to): an account, an
agreement, a book, a chart, a table, a diagram, a form, an image, an invoice, a letter, a map, a
memorandum, a plan, a return, a telegram and a voucher. The term “record’ is not limited to information
maintained in paper form but includes information maintained in electronic form.

34. Sub-paragraph n) of the multilateral version provides that the depositary of the Agreement is the
Secretary General of the OECD.

35. Sub-paragraph o) defines criminal tax matters. Criminal tax matters are defined as all tax matters
involving intentional conduct, which is liable to prosecution under the criminal laws of the applicant Party.
Criminal law provisions based on non-intentional conduct (e.g., provisions that involve strict or absolute
liability) do not constitute criminal tax matters for purposes of the Agreement. A tax matter involves
“intentional conduct” if the pertinent criminal law provision requires an element of intent. Sub-paragraph
o) does not create an obligation on the part of the applicant Party to prove to the requested Party an
element of intent in connection with the actual conduct under investigation.

36. Typical categories of conduct that constitute tax crimes include the wilful failure to file a tax
return within the prescribed time period; wilful omission or concealment of sums subject to tax; making
false or incomplete statements to the tax or other authorities of facts which obstruct the collection of tax;
deliberate omissions of entries in books and records; deliberate inclusion of false or incorrect entries in
books and records; interposition for the purposes of causing all or part of the wealth of another person to
escape tax; or consenting or acquiescing to an offence. Tax crimes, like other crimes, are punished through
fines, incarceration or both.

37. Sub-paragraph p) defines the term “criminal laws” used in sub-paragraph o). It makes clear that
criminal laws include criminal law provisions contained in a tax code or any other statute enacted by the
applicant Party. It further clarifies that criminal laws are only such laws that are designated as such under
domestic law and do not include provisions that might be deemed of a criminal nature for other purposes
such as for purposes of applying relevant human rights or other international conventions.

Paragraph 2

38. This paragraph establishes a general rule of interpretation for terms used in the Agreement but
not defined therein. The paragraph is similar to that contained in the OECD Model Convention on Income
and on Capital. It provides that any term used, but not defined, in the Agreement will be given the meaning
it has under the law of the Contracting Party applying the Agreement unless the context requires otherwise.
Contracting Parties may agree to allow the competent authorities to use the Mutual Agreement Procedure
provided for in Article 13 to agree the meaning of such an undefined term. However, the ability to do so
may depend on constitutional or other limitations. In cases in which the laws of the Contracting Party
applying the Agreement provide several meanings, any meaning given to the term under the applicable tax
laws will prevail over any meaning that is given to the term under any other laws. The last part of the
sentence is, of course, operational only where the Contracting Party applying the Agreement imposes taxes
and therefore has “applicable tax laws.”
 Article 5 (Exchange of Information Upon Request)

Paragraph 1

39. Paragraph 1 provides the general rule that the competent authority of the requested Party must
provide information upon request for the purposes referred to in Article 1. The paragraph makes clear that
the Agreement only covers exchange of information upon request (i.e., when the information requested
relates to a particular examination, inquiry or investigation) and does not cover automatic or spontaneous
exchange of information. However, Contracting Parties may wish to consider expanding their co-operation
in matters of information exchange for tax purposes by covering automatic and spontaneous exchanges and
simultaneous tax examinations.

40. The reference in the first sentence to Article 1 of the Agreement confirms that information must
be exchanged for both civil and criminal tax matters. The second sentence of paragraph 1 makes clear that
information in connection with criminal tax matters must be exchanged irrespective of whether or not the
conduct being investigated would also constitute a crime under the laws of the requested Party.

Paragraph 2

41. Paragraph 2 is intended to clarify that, in responding to a request, a Contracting Party will have to
take action to obtain the information requested and cannot rely solely on the information in the possession
of its competent authority. Reference is made to information “in its possession” rather than “available in
the tax files” because some Contracting Parties do not have tax files because they do not impose direct
taxes.

42. Upon receipt of an information request the competent authority of the requested Party must first
review whether it has all the information necessary to respond to a request. If the information in its own
possession proves inadequate, it must take “all relevant information gathering measures” to provide the
applicant Party with the information requested. The term “information gathering measures” is defined in
Article 4, paragraph 1, sub-paragraph l). An information gathering measure is “relevant” if it is capable of
obtaining the information requested by the applicant Party. The requested Party determines which
information gathering measures are relevant in a particular case.

43. Paragraph 2 further provides that information must be exchanged without regard to whether the
requested Party needs the information for its own tax purposes. This rule is needed because a tax interest
requirement might defeat effective exchange of information, for instance, in cases where the requested
Party does not impose an income tax or the request relates to an entity not subject to taxation within the
requested Party.

Paragraph 3

44. Paragraph 3 includes a provision intended to require the provision of information in a format
specifically requested by a Contracting Party to satisfy its evidentiary or other legal requirements to the
extent allowable under the laws of the requested Party. Such forms may include depositions of witnesses
and authenticated copies of original records. Under paragraph 3, the requested Party may decline to
provide the information in the specific form requested if such form is not allowable under its laws. A
refusal to provide the information in the format requested does not affect the obligation to provide the
information.

45. If requested by the applicant Party, authenticated copies of unedited original records should be
provided to the applicant Party. However, a requested Party may need to edit information unrelated to the
request if the provision of such information would be contrary to its laws. Furthermore, in some countries
authentication of documents might require translation in a language other than the language of the original
record. Where such issues may arise, Contracting Parties should consider discussing these issues in detail
during discussions prior to the conclusion of this Agreement.

Paragraph 4

46. Paragraph 4, sub-paragraph a), by referring explicitly to persons that may enjoy certain privilege
rights under domestic law, makes clear that such rights can not form the basis for declining a request unless
otherwise provided in Article 7. For instance, the inclusion of a reference to bank information in paragraph
4, sub-paragraph a) rules out that bank secrecy could be considered a part of public policy (ordre public).
Similarly, paragraph 4, sub-paragraph a) together with Article 7, paragraph 2 makes clear that information
that does not otherwise constitute a trade, business, industrial, commercial or professional secret or trade
process does not become such a secret simply because it is held by one of the persons mentioned.

47. Sub-paragraph a) should not be taken to suggest that a competent authority is obliged only to
have the authority to obtain and provide information from the persons mentioned. Sub-paragraph a) does
not limit the obligation imposed by Article 5, paragraph 1.

48. Sub-paragraph a) mentions information held by banks and other financial institutions. In
accordance with the Report “Improving Access to Bank Information for Tax Purposes”(OECD 2000),
access to information held by banks or other financial institutions may be by direct means or indirectly
through a judicial or administrative process. As stated in the report, the procedure for indirect access
should not be so burdensome and time-consuming as to act as an impediment to access to bank
information. Typically, requested bank information includes account, financial, and transactional
information as well as information on the identity or legal structure of account holders and parties to
financial transactions.

49. Paragraph 4, sub-paragraph a) further mentions information held by persons acting in an agency
or fiduciary capacity, including nominees and trustees. A person is generally said to act in a "fiduciary
capacity" when the business which he transacts, or the money or property, which he handles, is not his own
or for his own benefit, but for the benefit of another person, as to whom he stands in a relation implying
and necessitating confidence and trust on the one part and good faith on the other part. The term “agency”
is very broad and includes all forms of corporate service providers (e.g., company formation agents, trust
companies, registered agents, lawyers).

50. Sub-paragraph b) requires that the competent authorities of the Contracting Parties must have the
authority to obtain and provide ownership information. The purpose of the sub-paragraph is not to develop
a common “all purpose” definition of ownership among Contracting Parties, but to specify the types of
information that a Contracting Party may legitimately expect to receive in response to a request for
ownership information so that it may apply its own tax laws, including its domestic definition of beneficial
ownership.

51. In connection with companies and partnerships, the legal and beneficial owner of the shares or
partnership assets will usually be the same person. However, in some cases the legal ownership position
may be subject to a nominee or similar arrangement. Where the legal owner acts on behalf of another
person as a nominee or under a similar arrangement, such other person, rather than the legal owner, may be
the beneficial owner. Thus the starting point for the ownership analysis is legal ownership of shares or
partnership interests and all Contracting Parties must be able to obtain and provide information on legal
ownership. Partnership interests include all forms of partnership interests: general or limited or capital or
profits. However, in certain cases, legal ownership may be no more than a starting point. For example, in
any case where the legal owner acts on behalf of any other person as a nominee or under a similar
arrangement, the Contracting Parties should have the authority to obtain and provide information about that
other person who may be the beneficial owner in addition to information about the legal owner. An
example of a nominee is a nominee shareholding arrangement where the legal title-holder that also appears
as the shareholder of record acts as an agent for another person. Within the constraints of Article 2 of the
Agreement, the requested Party must have the authority to provide information about the persons in an
ownership chain.

52. In connection with trusts and foundations, sub-paragraph b) provides specifically the type of
identity information the Contracting Parties should have the authority to obtain and provide. This is not
limited to ownership information. The same rules should also be applied to persons that are substantially
similar to trusts or foundations such as the “Anstalt.” Therefore, a Contracting Party should have, for
example, the authority to obtain and provide information on the identity of the settlor and the beneficiaries
and persons who are in a position to direct how assets of the trust or foundation are to be dealt with.

53. Certain trusts, foundations, “Anstalten” or similar arrangements, may not have any identified
group of persons as beneficiaries but rather may support a general cause. Therefore, ownership information
should be read to include only identifiable persons. The term “foundation council” should be interpreted
very broadly to include any person or body of persons managing the foundation as well as persons who are
in a position to direct how assets of the trust or foundation are to be dealt with.

54. Most organisational structures will be classified as a company, a partnership, a trust, a foundation
or a person similar to a trust or foundation. However, there might be entities or structures for which
ownership information might be legitimately requested but that do not fall into any of these categories. For
instance, a structure might, as a matter of law, be of a purely contractual nature. In these cases, the
Contracting Parties should have the authority to obtain and provide information about any person with a
right to share in the income or gain of the structure or in the proceeds from any sale or liquidation.

55. Sub-paragraph b) also provides that a requested Party must have the authority to obtain and
provide ownership information for all persons in an ownership chain provided, as is set out in Article 2, the
information is held by the authorities of the requested State or is in the possession or control of persons
who are within the territorial jurisdiction of the requested Party. This language ensures that the applicant
Party need not submit separate information requests for each level of a chain of companies or other
persons. For instance, assume company A is a wholly-owned subsidiary of company B and both companies
are incorporated under the laws of Party C, a Contracting Party of the Agreement. If Party D, also a
Contracting Party, requests ownership information on company A and specifies in the request that it also
seeks ownership information on any person in A’s chain of ownership, Party C in its response to the
request must provide ownership information for both company A and B.

56. The second sentence of sub-paragraph b) provides that in the case of publicly traded companies
and public collective investment funds or schemes, the competent authorities need only provide ownership
information that the requested Party can obtain without disproportionate difficulties. Information can be
obtained only with “disproportionate difficulties” if the identification of owners, while theoretically
possible, would involve excessive costs or resources. Because such difficulties might easily arise in
connection with publicly traded companies and public collective investment funds or schemes where a true
public market for ownership interests exists, it was felt that such a clarification was particularly warranted.
At the same time it is recognised that where a true public market for ownership interests exists there is less
of a risk that such vehicles will be used for tax evasion or other non-compliance with the tax law. The
definitions of publicly traded companies and public collective investment funds or schemes are contained
in Article 4, paragraph 1, sub-paragraphs e) through h).
Paragraph 5

57. Paragraph 5 lists the information that the applicant Party must provide to the requested Party in
order to demonstrate the foreseeable relevance of the information requested to the administration or
enforcement of the applicant Party’s tax laws. While paragraph 5 contains important procedural
requirements that are intended to ensure that fishing expeditions do not occur, subparagraphs a) through g)
nevertheless need to be interpreted liberally in order not to frustrate effective exchange of information. The
following paragraphs give some examples to illustrate the application of the requirements in certain
situations.

58. Example 1 (sub-paragraph (a))

Where a Party is asking for account information but the identity of the accountholder(s) is unknown, sub-
paragraph (a) may be satisfied by supplying the account number or similar identifying information.

59. Example 2 (sub-paragraph (d)) (“is held”)

A taxpayer of Country A withdraws all funds from his bank account and is handed a large amount of cash.
He visits one bank in both country B and C, and then returns to Country A without the cash. In connection
with a subsequent investigation of the taxpayer, the competent authority of Country A sends a request to
Country B and to Country C for information regarding bank accounts that may have been opened by the
taxpayer at one or both of the banks he visited. Under such circumstances, the competent authority of
Country A has grounds to believe that the information is held in Country B or is in the possession or
control of a person subject to the jurisdiction of Country B. It also has grounds to believe the same with
respect to Country C. Country B (or C) can not decline the request on the basis that Country A has failed to
establish that the information “is” in Country B (or C), because it is equally likely that the information is in
the other country.

60. Example 3 (sub-paragraph (d))

A similar situation may arise where a person under investigation by Country X may or may not have fled
Country Y and his bank account there may or may not have been closed. As long as country X is able to
connect the person to Country Y, Country Y may not refuse the request on the ground that Country X does
not have grounds for believing that the requested information “is” held in Country Y. Country X may
legitimately expect Country Y to make an inquiry into the matter, and if a bank account is found, to
provide the requested information.

61. Sub-paragraph d) provides that the applicant Party shall inform the requested Party of the
grounds for believing that the information is held in the requested Party or is in the possession or control of
a person within the jurisdiction of the requested Party. The term “held in the requested Party” includes
information held by any government agency or authority of the requested Party.

62. Sub-paragraph f) needs to be read in conjunction with Article 7, paragraph 1. In particular, see
paragraph 77 of the Commentary on Article 7. The statement required under sub-paragraph f) covers three
elements: first, that the request is in conformity with the law and administrative practices of the applicant
Party; second that the information requested would be obtainable under the laws or in the normal course of
administration of the applicant Party if the information were within the jurisdiction of the applicant Party;
and third that the information request is in conformity with the Agreement. The “normal course of
administrative practice” may include special investigations or special examinations of the business
accounts kept by the taxpayer or other persons, provided that the tax authorities of the applicant Party
would make similar investigations or examinations if the information were within their jurisdiction.
63. Sub-paragraph g) is explained by the fact that, depending on the tax system of the requested
Party, a request for information may place an extra burden on the administrative machinery of the
requested Party. Therefore, a request should only be contemplated if an applicant Party has no convenient
means to obtain the information available within its own jurisdiction. In as far as other means are still
available in the applicant Party, the statement prescribed in sub-paragraph g) should explain that these
would give rise to disproportionate difficulties. In this last case an element of proportionality plays a role.
It should be easier for the requested Party to obtain the information sought after, than for the applicant
Party. For example, obtaining information from one supplier in the requested Party may lead to the same
information as seeking information from a large number of buyers in the applicant Party.

64. It is in the applicant Party’s own interest to provide as much information as possible in order to
facilitate the prompt response by the requested Party. Hence, incomplete information requests should be
rare. The requested Party may ask for additional information but a request for additional information
should not delay a response to an information request that complies with the rules of paragraph 5. For
possibilities of declining a request, see Article 7 and the accompanying Commentary.

Paragraph 6

65. Paragraph 6 sets out procedures for handling requests to ensure prompt responses. The 90 day
period set out in subparagraph b) may be extended if required, for instance, by the volume of information
requested or the need to authenticate numerous documents. If the competent authority of the requested
Party is unable to provide the information within the 90 day period it should immediately notify the
competent authority of the applicant Party. The notification should specify the reasons for not having
provided the information within the 90 day period (or extended period). Reasons for not having provided
the information include, a situation where a judicial or administrative process required to obtain the
information has not yet been completed. The notification may usefully contain an estimate of the time still
needed to comply with the request. Finally, paragraph 6 encourages the requested Party to react as
promptly as possible and, for instance, where appropriate and practical, even before the time limits
established under sub-paragraphs a) and b) have expired.

Article 6 (Tax Examinations Abroad)

Paragraph 1

66. Paragraph 1 provides that a Contracting Party may allow representatives of the applicant Party to
enter the territory of the requested Party to interview individuals and to examine records with the written
consent of the persons concerned. The decision of whether to allow such examinations and if so on what
terms, lies exclusively in the hands of the requested Party. For instance, the requested Party may determine
that a representative of the requested Party is present at some or all such interviews or examinations. This
provision enables officials of the applicant Party to participate directly in gathering information in the
requested Party but only with the permission of the requested Party and the consent of the persons
concerned. Officials of the applicant Party would have no authority to compel disclosure of any
information in those circumstances. Given that many jurisdictions and smaller countries have limited
resources with which to respond to requests, this provision can be a useful alternative to the use of their
own resources to gather information. While retaining full control of the process, the requested Party is
freed from the cost and resource implications that it may otherwise face. Country experience suggests that
tax examinations abroad can benefit both the applicant and the requested Party. Taxpayers could be
interested in such a procedure because, it might spare them the burden of having to make copies of
voluminous records to respond to a request.
Paragraph 2

67. Paragraph 2 authorises, but does not require, the requested Party to permit the presence of foreign
tax officials to be present during a tax examination initiated by the requested Party in its jurisdiction, for
example, for purposes of obtaining the requested information. The decision of whether to allow the foreign
representatives to be present lies exclusively within the hands of the competent authority of the requested
Party. It is understood that this type of assistance should not be requested unless the competent authority
of the applicant Party is convinced that the presence of its representatives at the examination in the
requested Party will contribute to a considerable extent to the solution of a domestic tax case.
Furthermore, requests for such assistance should not be made in minor cases. This does not necessarily
imply that large amounts of tax have to be involved in the particular case. Other justifications for such a
request may be the fact that the matter is of prime importance for the solution of other domestic tax cases
or that the foreign examination is to be regarded as part of an examination on a large scale embracing
domestic enterprises and residents.

68. The applicant Party should set out the motive for the request as thoroughly as possible. The
request should include a clear description of the domestic tax case to which the request relates. It should
also indicate the special reasons why the physical presence of a representative of the competent authority is
important. If the competent authority of the applicant Party wishes the examination to be conducted in a
specific manner or at a specified time, such wishes should be stated in the request.

69. The representatives of the competent authority of the applicant Party may be present only for the
appropriate part of the tax examination. The authorities of the requested Party will ensure that this
requirement is fulfilled by virtue of the exclusive authority they exercise in respect of the conduct of the
examination.

Paragraph 3

70. Paragraph 3 sets out the procedures to be followed if a request under paragraph 2 has been
granted. All decisions on how the examination is to be carried out will be taken by the authority or the
official of the requested Party in charge of the examination.

Article 7 (Possibility of Declining a Request)

71. The purpose of this Article is to identify the situations in which a requested Party is not required
to supply information in response to a request. If the conditions for any of the grounds for declining a
request under Article 7 are met, the requested Party is given discretion to refuse to provide the information
but it should carefully weigh the interests of the applicant Party with the pertinent reasons for declining the
request. However, if the requested Party does provide the information the person concerned cannot allege
an infraction of the rules on secrecy. In the event that the requested Party declines a request for information
it shall inform the applicant Party of the grounds for its decision at the earliest opportunity.

Paragraph 1

72. The first sentence of paragraph 1 makes clear that a requested Party is not required to obtain and
provide information that the applicant Party would not be able to obtain under similar circumstances under
its own laws for purposes of the administration or enforcement of its own tax laws.

73. This rule is intended to prevent the applicant Party from circumventing its domestic law
limitations by requesting information from the other Contracting Party thus making use of greater powers
than it possesses under its own laws. For instance, most countries recognise under their domestic laws that
information cannot be obtained from a person to the extent such person can claim the privilege against self-
incrimination. A requested Party may, therefore, decline a request if the applicant Party would have been
precluded by its own self-incrimination rules from obtaining the information under similar circumstances.

74. In practice, however, the privilege against self-incrimination should have little, if any, application
in connection with most information requests. The privilege against self-incrimination is personal and
cannot be claimed by an individual who himself is not at risk of criminal prosecution. The overwhelming
majority of information requests seek to obtain information from third parties such as banks, intermediaries
or the other party to a contract and not from the individual under investigation. Furthermore, the privilege
against self-incrimination generally does not attach to persons other than natural persons.

75. The second sentence of paragraph 1 provides that a requested Party may decline a request for
information in cases where the request is not made in conformity with the Agreement.

76. Both the first and the second sentence of paragraph 1 raise the question of how the statements
provided by the applicant Party under Article 5, paragraph 5, sub-paragraph f) relate to the grounds for
declining a request under Article 7, paragraph 1. The provision of the respective statements should
generally be sufficient to establish that no reasons for declining a request under Article 7, paragraph 1
exist. However, a requested Party that has received statements to this effect may still decline the request if
it has grounds for believing that the statements are clearly inaccurate.

77. Where a requested Party, in reliance on such statements, provides information to the applicant
Party it remains within the framework of this Agreement. A requested Party is under no obligation to
research or verify the statements provided by the applicant Party. The responsibility for the accuracy of the
statement lies with the applicant Party.

Paragraph 2

78. The first sentence of paragraph 2 provides that a Contracting Party is not obliged to provide
information which would disclose any trade, business, industrial, commercial or professional secret or
trade process.

79. Most information requests will not raise issues of trade, business or other secrets. For instance,
information requested in connection with a person engaged only in passive investment activities is unlikely
to contain any trade, business, industrial or commercial or professional secret because such person is not
conducting any trade, business, industrial or commercial or professional activity.

80. Financial information, including books and records, does not generally constitute a trade,
business or other secret. However, in certain limited cases the disclosure of financial information might
reveal a trade business or other secret. For instance, a requested Party may decline a request for
information on certain purchase records where the disclosure of such information would reveal the
proprietary formula of a product.

81. Paragraph 2 has its main application where the provision of information in response to a request
would reveal protected intellectual property created by the holder of the information or a third person. For
instance, a bank might hold a pending patent application for safe keeping or a trade process might be
described in a loan application. In these cases the requested Party may decline any portion of a request for
information that would reveal information protected by patent, copyright or other intellectual property
laws.

82. The second sentence of paragraph 2 makes clear that the Agreement overrides any domestic laws
or practices that may treat information as a trade, business, industrial, commercial or professional secret or
trade process merely because it is held by a person identified in Article 5, paragraph 4, sub-paragraph a) or
merely because it is ownership information. Thus, in connection with information held by banks, financial
institutions etc., the Agreement overrides domestic laws or practices that treat the information as a trade or
other secret when in the hands of such person but would not afford such protection when in the hands of
another person, for instance, the taxpayer under investigation. In connection with ownership information,
the Agreement makes clear that information requests cannot be declined merely because domestic laws or
practices may treat such ownership information as a trade or other secret.

83. Before invoking this provision, a requested Party should carefully weigh the interests of the
person protected by its laws with the interests of the applicant Party. In its deliberations the requested Party
should also take into account the confidentiality rules of Article 8.

Paragraph 3

84. A Contracting Party may decline a request if the information requested is protected by the
attorney-client privilege as defined in paragraph 3. However, where the equivalent privilege under the
domestic law of the requested Party is narrower than the definition contained in paragraph 3 (e.g., the law
of the requested Party does not recognise a privilege in tax matters, or it does not recognise a privilege in
criminal tax matters) a requested Party may not decline a request unless it can base its refusal to provide
the information on Article 7, paragraph 1.

85. Under paragraph 3 the attorney-client privilege attaches to any information that constitutes (1)
“confidential communication,” between (2) “a client and an attorney, solicitor or other admitted legal
representative,” if such communication (3) “is produced for the purposes of seeking or providing legal
advice“ or (4) is “produced for the purposes of use in existing or contemplated legal proceedings.”

86. Communication is “confidential” if the client can reasonably have expected the communication
to be kept secret. For instance, communications made in the presence of third parties that are neither staff
nor otherwise agents of the attorney are not confidential communications. Similarly, communications made
to the attorney by the client with the instruction to share them with such third parties are not confidential
communications.

87. The communications must be between a client and an attorney, solicitor or other admitted legal
representative. Thus, the attorney-client privilege applies only if the attorney, solicitor or other legal
representative is admitted to practice law. Communications with persons of legal training but not admitted
to practice law are not protected under the attorney-client privilege rules.

88. Communications between a client and an attorney, solicitor or other admitted legal representative
are only privileged if, and to the extent that, the attorney, solicitor or other legal representative acts in his
or her capacity as an attorney, solicitor or other legal representative. For instance, to the extent that an
attorney acts as a nominee shareholder, a trustee, a settlor, a company director or under a power of attorney
to represent the company in its business affairs, he can not claim the attorney-client privilege with respect
to any information resulting from and relating to any such activity.

89. Sub-paragraph a) requires that the communications be “produced for the purposes of seeking or
providing legal advice.” The attorney-client privilege covers communications by both client and attorney
provided the communications are produced for purposes of either seeking or providing legal advice.
Because the communication must be produced for the purposes of seeking or providing legal advice, the
privilege does not attach to documents or records delivered to an attorney in an attempt to protect such
documents or records from disclosure. Also, information on the identity of a person, such as a director or
beneficial owner of a company, is typically not covered by the privilege.
90. Sub-paragraph b) addresses the case where the attorney does not act in an advisory function but
has been engaged to act as a representative in legal proceedings, both at the administrative and the judicial
level. Sub-paragraph b) requires that the communications must be produced for the purposes of use in
existing or contemplated legal proceedings. It covers communications both by the client and the attorney
provided the communications have been produced for use in existing or contemplated legal proceedings.

Paragraph 4

91. Paragraph 4 stipulates that Contracting Parties do not have to supply information the disclosure
of which would be contrary to public policy (ordre public). “Public policy” and its French equivalent
“ordre public” refer to information which concerns the vital interests of the Party itself. This exception can
only be invoked in extreme cases. For instance, a case of public policy would arise if a tax investigation in
the applicant Party were motivated by political or racial persecution. Reasons of public policy might also
be invoked where the information constitutes a state secret, for instance sensitive information held by
secret services the disclosure of which would be contrary to the vital interests of the requested Party. Thus,
issues of public policy should rarely arise in the context of requests for information that otherwise fall
within the scope of this Agreement.

Paragraph 5

92. Paragraph 5 clarifies that an information request must not be refused on the basis that the tax
claim to which it relates is disputed.

Paragraph 6

93. In the exceptional circumstances in which this issue may arise, paragraph 6 allows the requested
Party to decline a request where the information requested by the applicant Party would be used to
administer or enforce tax laws of the applicant Party, or any requirements connected therewith, which
discriminate against nationals of the requested Party. Paragraph 6 is intended to ensure that the Agreement
does not result in discrimination between nationals of the requested Party and identically placed nationals
of the applicant Party. Nationals are not identically placed where an applicant state national is a resident of
that state while a requested state national is not. Thus, paragraph 6 does not apply to cases where tax rules
differ only on the basis of residence. The person’s nationality as such should not lay the taxpayer open to
any inequality of treatment. This applies both to procedural matters (differences between the safeguards or
remedies available to the taxpayer, for example) and to substantive matters, such as the rate of tax
applicable.
 Article 8 (Confidentiality)

94. Ensuring that adequate protection is provided to information received from another Contracting
Party is essential to any exchange of information instrument relating to tax matters. Exchange of
information for tax matters must always be coupled with stringent safeguards to ensure that the information
is used only for the purposes specified in Article 1 of the Agreement. Respect for the confidentiality of
information is necessary to protect the legitimate interests of taxpayers. Mutual assistance between
competent authorities is only feasible if each is assured that the other will treat with proper confidence the
information, which it obtains in the course of their co-operation. The Contracting Parties must have such
safeguards in place. Some Contracting Parties may prefer to use the term “secret”, rather than the term
“confidential” in this Article. The terms are considered synonymous and interchangeable for purposes of
this Article and Contracting Parties are free to use either term.

95. The first sentence provides that any information received pursuant to this Agreement by a
Contracting Party must be treated as confidential. Information may be received by both the applicant Party
and the requested Party (see, Article 5 paragraph 5).

96. The information may be disclosed only to persons and authorities involved in the assessment or
collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to
taxes covered by the Agreement. This means that the information may also be communicated to the
taxpayer, his proxy or to a witness. The Agreement only permits but does not require disclosure of the
information to the taxpayer. In fact, there may be cases in which information is given in confidence to the
requested Party and the source of the information may have a legitimate interest in not disclosing it to the
taxpayer. The competent authorities concerned should discuss such cases with a view to finding a mutually
acceptable mechanism for addressing them. The competent authorities of the applicant Party need no
authorisation, consent or other form of approval for the provision of the information received to any of the
persons or authorities identified. The references to “public court proceedings” and to “judicial decisions”’
in this paragraph extend to include proceedings and decisions which, while not formally being “judicial”,
are of a similar character. An example would be an administrative tribunal reaching decisions on tax
matters that may be binding or may be appealed to a court or a further tribunal.

97. The third sentence precludes disclosure by the applicant Party of the information to a third Party
unless express written consent is given by the Contracting Party that supplied the information. The request
for consent to pass on the information to a third party is not to be considered as a normal request for
information for the purposes of this Agreement.

Article 9 (Costs)

98. Article 9 allows the Contracting Parties to agree upon rules regarding the costs of obtaining and
providing information in response to a request. In general, costs that would be incurred in the ordinary
course of administering the domestic tax laws of the requested State would normally be expected to be
borne by the requested State when such costs are incurred for purposes of responding to a request for
information. Such costs would normally cover routine tasks such as obtaining and providing copies of
documents.

99. Flexibility is likely to be required in determining the incidence of costs to take into account
factors such as the likely flow of information requests between the Contracting Parties, whether both
Parties have income tax administrations, the capacity of each Party to obtain and provide information, and
the volume of information involved. A variety of methods may be used to allocate costs between the
Contracting Parties. For example, a determination of which Party will bear the costs could be agreed to on
a case by case base. Alternatively, the competent authorities may wish to establish a scale of fees for the
processing of requests that would take into account the amount of work involved in responding to a
request. The Agreement allows for the Contracting Parties or the competent authorities, if so delegated, to
agree upon the rules, because it is difficult to take into account the particular circumstances of each Party.

Article 10 (Implementing Legislation)

100. Article 10 establishes the requirement for Contracting Parties to enact any legislation necessary
to comply with the terms of the Agreement. Article 10 obliges the Contracting Parties to enact any
necessary legislation with effect as of the date specified in Article 15. Implicitly, Article 10 also obliges
Contracting Parties to refrain from introducing any new legislation contrary to their obligations under this
Agreement.

Article 11 (Language)

101. Article 11 provides the competent authorities of the Contracting Parties with the flexibility to
agree on the language(s) that will be used in making and responding to requests, with English and French
as options where no other language is chosen. This article may not be necessary in the bilateral context.

Article 12 (Other International Agreements or Arrangements)

102. Article 12 is intended to ensure that the applicant Party is able to use the international instrument
it deems most appropriate for obtaining the necessary information. This article may not be required in the
bilateral context.

Article 13 (Mutual Agreement Procedure)

Paragraph 1

103. This Article institutes a mutual agreement procedure for resolving difficulties arising out of the
implementation or interpretation of the Agreement. Under this provision, the competent authorities, within
their powers under domestic law, can complete or clarify the meaning of a term in order to obviate any
difficulty.

104. Mutual agreements resolving general difficulties of interpretation or application are binding on
administrations as long as the competent authorities do not agree to modify or rescind the mutual
agreement.

Paragraph 2

105. Paragraph 2 identifies other specific types of agreements that may be reached between
competent authorities, in addition to those referred to in paragraph 1.
Paragraph 3

106. Paragraph 3 determines how the competent authorities may consult for the purposes of reaching a
mutual agreement. It provides that the competent authorities may communicate with each other directly.
Thus, it would not be necessary to go through diplomatic channels. The competent authorities may
communicate with each other by letter, facsimile transmission, telephone, direct meetings, or any other
convenient means for purposes of reaching a mutual agreement.

Paragraph 4

107. Paragraph 4 of the multilateral version clarifies that agreements reached between the competent
authorities of two or more Contracting Parties would not in any way bind the competent authorities of
Contracting Parties that were not parties to the particular agreement. The result is self-evident in the
bilateral context and no corresponding provision has been included.

Paragraph 5

108. Paragraph 5 provides that the Contracting Parties may agree to other forms of dispute resolution.
For instance, Contracting Parties may stipulate that under certain circumstances, e.g., the failure of
resolving a matter through a mutual agreement procedure, a matter may be referred to arbitration.

Article 14 (Depositary’s Functions)

109. Article 14 of the multilateral version discusses the functions of the depositary. There is no
corresponding provision in the bilateral context.

Article 15 (Entry into Force)

Paragraph 1

110. Paragraph 1 of the bilateral version contains standard language used in bilateral treaties. The
provision is similar to Article 29, paragraph 1 of the OECD Model Convention on Income and on Capital.

Paragraph 2

111. Paragraph 2 of the multilateral version provides that the Agreement will enter into force only
between those Contracting Parties that have mutually stated their intention to be bound vis-à-vis the other
Contracting Party. There is no corresponding provision in the bilateral context.

Paragraph 3

112. Paragraph 3 differentiates between exchange of information in criminal tax matters and exchange
of information in all other tax matters. With regard to criminal tax matters the Agreement will enter into
force on January 1, 2004. Of course, where Contracting Parties already have in place a mechanism (e.g., a
mutual legal assistance treaty) that allows information exchange on criminal tax matters consistent with the
standard described in this Agreement, the January 1, 2004 date would not be relevant. See Article 12 of the
Agreement and paragraph 5 of the introduction. With regard to all other matters the Agreement will enter
into force on January 1, 2006. The multilateral version also provides a special rule for parties that
subsequently want to make use of the Agreement. In such a case the Agreement will come into force on the
30th day after deposit of both instruments. Consistent with paragraph 2, the Agreement enters into force
only between two Contracting Parties that mutually indicate their desire to be bound vis-à-vis another
Contracting Party. Thus, both parties must deposit an instrument unless one of the parties has already
indicated its desire to be bound vis-à-vis the other party in an earlier instrument. The 30-day period
commences when both instruments have been deposited.

Paragraph 4

113. Paragraph 4 contains the rules on the effective dates of the Agreement. The rules are identical for
both the multilateral and the bilateral version. Contracting Parties are free to agree on an earlier effective
date.

114. The rules of paragraph 4 do not preclude an applicant Party from requesting information that
precedes the effective date of the Agreement provided it relates to a taxable period or chargeable event
following the effective date. A requested Party, however, is not in violation of this Agreement if it is
unable to obtain information predating the effective date of the Agreement on the grounds that the
information was not required to be maintained at the time and is not available at the time of the request.

Article 16 (Termination)

115. Paragraphs 1 and 2 address issues concerning termination. The fact that the multilateral version
speaks of “termination” rather than denunciation reflects the nature of the multilateral version as more of a
bundle of identical bilateral treaties rather than a ”true” multilateral agreement.

116. Paragraph 3 ensures that the obligations created under Article 8 survive the termination of the
Agreement.