Tax Deadline Imminent

Written by Bill Blevins

Are you fully informed?

by Bill Blevins, Financial Correspondent

The EU�s revolutionary Savings Tax Directive commences on 1 July. It will change the way expatriates handle their financial affairs. All EU Member States, plus dependent territories and key third parties, will now either automatically exchange information about your finances or deduct a withholding tax at source.

I have put together some frequently asked questions on the Directive, which will provide much of the information you need to review your financial planning at this critical point.

Will the Directive start on time?

In short YES! It would be a miracle if there were now any last minute hiccoughs! There has been a lot of progress over recent months to ensure it will start in July as planned. Switzerland has signed its agreement with the EU and its parliament has approved it. The CEO of the Swiss Bankers Association and the Finance Minister said they do not expect a referendum. Andorra, Liechtenstein, Monaco and San Marino have each signed their agreements, as have Jersey, Guernsey and Isle of Man.

What is the aim of the Directive?

To ensure individuals resident in the EU are taxed on their savings income in accordance with domestic law. Every EU citizen will have no choice but to pay tax on interest earned in the EU and the jurisdictions listed above, regardless of where it is earned and whether it is declared or not.

What sort of information will be exchanged?

This includes your name and residence, details of the paying agent (banks etc) including account number, the amount of savings income earned and the period to which it relates. All this will be given to your local tax authority.

How often will this information be exchanged?

At least once a year, within six months after the end of the tax year. It will happen automatically, and not just in cases where tax evasion is suspected. Information about your affairs will be exchanged, even if they are fully legal and you have paid all your taxes.

What will my tax authority do with this information?

They will compare it with details provided by you on your income tax return. If the amounts differ slightly they may just send you a tax bill, but if there is a significant difference, or they suspect tax evasion, they are likely to start investigations and, perhaps, with a much wider remit than simply investigating undeclared income. They may include looking back over past years.

Is there anything I can do to maintain financial confidentiality?

It is more important than ever that your financial and tax planning follow the letter of the law. If this is not already the case you need to legitimise your affairs right now. You can legally lower your tax bill by setting up an offshore insurance bond like a Personal Portfolio Bond. Insurance policies are outside the scope of the Directive - they will not be reported on and no withholding tax will be deducted. You can hold your choice of investment assets within the bond (including some cash) and the tax benefits are stunning. This needs to be done before information starts being recorded, otherwise it may be too late and the taxman will already have his suspicions.

The Directive refers to �savings income�. Can you clarify what this means?

In simple terms it means �interest earnings� and this is what will be reported on or taxed. It includes:

1) Interest paid or credited to an account, such as interest earned from bank deposit accounts and income from government securities; bonds and debentures, including premiums and prizes attached to such securities.

2) Interest rolled up and paid out at the sale or redemption of a debt claim. This will include any interest rolled up in an accumulating bank deposit account, i.e. one where interest is not credited until a withdrawal is made. As the rate of withholding tax increases, this may mean that your rate of tax on such withdrawals may be higher than they would be if the tax was applied from outset.

3) Income deriving from interest payments from certain unit trusts and investment funds which have invested more than 15% of their investment in debt claims, eg. Bond Funds.

4) Income realised upon the sale or redemption of investment funds with at least 40% of the underlying investments in interest bearing instruments.

Is there anything that is not included?

Information will not be exchanged, nor tax deducted, on the following:

� Stocks and shares

� Currency trading

� Pension plans

� Life assurance policies, including the assets held within such a �wrapper�.

� Income payments to companies and trusts.

With careful planning and the right advice you can use these structures to legally mitigate your tax bill.

How does the withholding tax option work?

Jersey, Guernsey, Isle of Man, Austria, Belgium and Luxemburg have been granted a �transitional provision� whereby they can deduct a withholding tax instead of automatically exchanging information. This tax will be deducted at source and starts at 15%, rises to 20% in July 2008 and to 35% in 2011. No actual details about you will be exchanged. Non-EU countries Switzerland, Andorra, Liechtenstein, Monaco and San Marino have agreed to do the same, but it is important to note that in all cases this is only transitional. The EU�s ultimate aim is for all these jurisdictions to automatically exchange information, and it is working towards achieving this goal by 2011.

What about Gibraltar?

Gibraltar was not given a choice. It must adopt the same procedure as the UK, which is to automatically exchange information.

My bank in Jersey has mentioned a �retention tax�. What is this?

It is just another name for the withholding tax - the terms are interchangeable. The UK Crown Dependencies have chosen to use this name to distinguish the islands from EU Member States.

I declare all my interest earnings and pay tax accordingly. Will I now pay tax twice on my Guernsey account?

No, your bank should write to offer you a choice of withholding tax or exchange of information. If you chose the latter, tax will not be deducted at source and instead all your details will be forwarded to your tax local authority.

Does all this mean there is no way to avoid tax any more?

You are not bound by law to choose the financial planning method that pays the most tax; you are simply obliged to declare all your earnings and wealth as per the regulations of the country you live in, which is not the same thing. Some financial structures either do not need to be reported, or the income generated is not taxable. It is therefore well worth investigating ways of legally lowering your tax bill. Under the current climate, though, expert advice is essential if you want to both save tax and keep on the right side of the law.

� Bill Blevins
Blevins Franks International Limited

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