Member states increase tax transparency

Member states have adopted legislation on exchanging tax information, but the rules are likely to be superseded by an OECD standard before ever being applied.

Rules increasing the amount of tax information exchanged by national authorities were adopted by European Union member states today (24 March), ending more than five years of political deadlock. The breakthrough came a few days earlier (20 March) at a summit of EU leaders, when Austria and Luxembourg dropped their opposition. 

Those two EU member states had blocked the European Commission proposal since 2008, when the Commission sought to amend an EU law from 2005 that required member state tax authorities to exchange information about bank accounts held by non-resident EU citizens. This would include, for example, EU citizens residing in Belgium but with a bank account in Luxembourg. But the 2005 law, which was intended to reduce tax evasion and avoidance, is open to abuse. Tax authorities were not required to exchange information about other saving arrangements, such as investment funds, or about accounts held by foundations based outside the EU, even when they were owned by EU citizens. The 2008 proposal closes these loopholes, which have long been exploited by investors.

But Luxembourg and Austria objected to the proposal because of fears that it would harm their financial services industries, which would be badly affected and suffer an exodus of customers to less open jurisdictions. Under EU rules, each member state has a veto over legislative proposals dealing with taxation, allowing the two countries effectively to block the proposal. 

The official line is that Luxembourg and Austria dropped their opposition after the Commission made progress in negotiations on similar rules with five low-tax jurisdictions in Europe: Switzerland, Lichtenstein, Andorra, San Marino and Monaco. The Commission intends to conclude those negotiations, which was a key demand of Austria and Luxembourg, by the end of 2014. 

But in reality, Austria and Luxembourg have been outflanked by international developments. A notable example is new rules adopted by the United States in 2010, which oblige all foreign banks to give US tax authorities the details of all accounts held by US citizens. The US operations of any banks that do not comply with that requirement face severe sanctions.

Similarly, the Organisation for Economic Co-operation and Development is developing a global standard on the exchange of information. At least 40 countries, including the world’s 20 largest economies, are expected to apply the standard. All these developments left Luxembourg and Austria increasingly isolated both within the EU and on the international stage.

The irony is that after several years of negotiations, which included the proposal being discussed by EU leaders on at least three occasions, the exact rules adopted by member states today, which are supposed to come into force in 2017, are unlikely to be implemented. This is because the EU will first align the legislation with the international standard being developed by the OECD, which will be presented to finance ministers from the G20 in September. 

So why has so much attention been paid to the EU proposal? Because by resolving their internal differences, EU member states are able to present a united front in international negotiations on the automatic exchange of information. According to Algirdas Šemeta, the European commissioner for taxation: “Today’s adoption means that we remain on track as global front-runners in tax good governance.”

This is important because global solutions have become the most important way to tackle tax avoidance and evasion. On Friday (21 March), Herman Van Rompuy, the president of the European Council, praised the deal as a sign that “banking secrecy is set to die”, but only a global standard will ensure that wish comes true.