Part 1 - AL-Tax

International Taxation HandbookIn comparison with the small number of signatories of existing information-sharingtreaties (typically less than 25), the EU savings tax directive has been quite successfulin achieving multilateral commitments to information exchange.The savings tax features a number of loopholes, which could potentially harmits effectiveness in addressing international tax evasion. First, not all the importantfinancial centers (for example, Singapore and Hong Kong) are included. Evensmaller ones that are obvious candidates, such as the Bahamas and Bermuda, arenot covered. Second, asset coverage is incomplete, which is likely to give rise tosubstitution away from bonds and bank deposits to shares. Third, truly wealthyindividuals may incorporate themselves to avoid savings taxation, thereby shiftingthe distribution of income in favor of wealthy individuals. Finally, differences inthe interpretation of legal provisions and the absence of a uniform taxpayer identificationnumber may reduce the usefulness of received information.The EU savings tax aims for a regime in which all participating jurisdictionsshare information eventually. Nevertheless, it is clear that a number of countrieswith a bank secrecy tradition – notably Switzerland and Luxembourg – are reluctantto commit themselves to information sharing of the kind that others seek.This legal hurdle and the weaknesses identified above will lessen the effectivenessof the EU savings tax. Not much is known about the effectiveness of the EUsavings tax and other information-sharing arrangements, which is not surprisinggiven the confidentiality with which data on information sharing is treated. It istherefore unlikely that information sharing will put an end to discussions on thecoordination of underlying income tax systems themselves.Notes1. Note that the terms cross-border savings, deposits, and investments will be used interchangeablyto refer to passive (portfolio) investments abroad.2. Following Hines and Rice (1994), tax havens are defined as locations that: (i) Levy low or negligiblecorporate or personal tax rates; (ii) Feature legislation that supports banking secrecy;(iii) Employ advanced communications facilities; (iv) Promote themselves as financial centers.Others, for example the OECD (1998), employ slightly different definitions.3. Based on a group of countries (see Table 10.3 for a country list) for which the Bank forInternational Settlements (BIS) has data available.4. Many EU governments have to cut public spending to meet the ceilings on their fiscal deficitand debt (of 3% and 60% of GDP respectively) imposed by the Stability and Growth Pact.5. The aim of a tax-crediting system is to prevent double taxation in the residence country of taxedforeign source income of its residents. Typically, the credit is capped by the tax liability in theresidence country, implying that residence countries do not refund excess tax to the beneficial262