Part 1 - AL-Tax

Chapter 10consequence of information shared to the jurisdiction that provided it, smallcountries may be induced to opt for information exchange.10.4 The EU savings taxThis section provides a brief historical background of the EU savings tax directive,analyzes its key features, and studies its effectiveness in taxing cross-bordersavings income.10.4.1 Brief historical backgroundSince the late 1980s, there have been efforts in the European Union to coordinatethe taxation of residents’ cross-border savings income. Table 10.2 provides anoverview of the key elements of the various proposals. In 1989, the EuropeanCommission submitted a proposal for a Council directive, which envisaged a community-wideminimum withholding tax of 15% on cross-border savings income ofEU residents. The proposal was heavily criticized on two accounts: (i) For not coveringkey outside tax havens, potentially generating capital outflows to these jurisdictions;(ii) For intervening with a country’s sovereignty to set its own tax rates.Faced with these political hurdles, attention turned to the alternative strategyof encouraging source countries to pass to the tax authorities of the residencecountry sufficient information for the latter to bring all the capital income of theirresidents into the tax net, so at least preserving countries’ sovereignty in tax ratesetting. It is important to note that tax information sharing is not an entirely newinstrument because various treaties exist that provide some authority for thesharing of information on income taxes between EU countries (the most commonlyknown are bilateral double-taxation treaties between EU Member Statesand the EU Mutual Assistance directive). The main problem with the currentlegal framework is that it allows Member States to refuse furnishing informationunder certain conditions (for example, if it is contrary to their domestic laws orrequires efforts beyond normal administrative practice). Furthermore, the existinglegal frameworks do not incorporate common rules concerning the details ofthe information to be provided and frequency of exchanges.In view of the bank secrecy tradition in Austria, Belgium, and Luxembourg, auniform information-sharing regime turned out to be politically unfeasible. 13A new proposal for a directive was presented in 1998, taking into account banksecrecy. The so-called coexistence model allowed each Member State the choice251