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Wednesday, 21 June, 2000, 16:41 GMT 17:41 UK
Taxing time for dodgers
EU leaders reach agreement on phasing out banking secrecy to crack down on tax dodgers
EU leaders unexpectedly clinched a last-minute deal on the thorny issue of taxing cross-border savings at their summit in Portugal. BBC News Online examines how it works and what it means to savers.

The debate over how to tax cross-border savings was prompted by tax dodging - and if you are not a tax dodger you have nothing to fear.

Some people have been putting their savings into accounts in other countries which have banking secrecy laws and not declaring the interest they earn to the tax authorities where they live.

For example, if you live in Germany and pay tax there you could load up the boot of your car with cash, drive over the border into Luxembourg, which has banking secrecy laws, and pay it into an account there.

No one would know how much interest you earn on your savings so if you do not declare it to the German tax authorities you will get away with paying no tax on it.

Crack-down on tax evasion

So many people have been doing this the EU decided it was time to clamp down. The original idea was for banks in all EU countries to deduct tax at source.

This kind of "withholding tax" is already in effect for residents in the UK and many other countries. Savers are paid interest with basic rate tax already deducted unless they prove entitlement to interest paid gross.

Higher rate tax payers have to declare on their returns the interest they earn on savings and pay a tax top-up.

The idea was for banks across the EU to deduct tax at 20% to 25% from interest paid into non-residents' accounts so the tax dodgers could no longer get away with it.

The trouble is, dodgers could still go to non-EU countries like Switzerland, which also has banking secrecy laws, and stash their cash there.

What the deal means for savers

What has been agreed by the EU is a complicated system combining a withholding tax in some countries with a gradual progression towards an open exchange of information across the EU.

In essence, this means that when the system is fully functioning banks will provide information on the interest paid on non-residents' accounts to the country where the account holder lives.

So our example tax dodger would find the German taxman had been informed by Luxembourg of just how much interest had been paid and would be charged tax accordingly.

Anyone conducting their affairs honestly would not be affected.

Of course, the system will work only if non-EU countries with banking secrecy laws agree to cooperate with the EU.

The EU has timetabled two years to achieve these agreements, and some member nations, such as Austria, have questioned whether it is likely to be successful.

Convincing argument

Financial centres such as Switzerland, the US, Liechtenstein, Monaco, Andorra and San Marino might take a lot of convincing if they fear they will lose business.

However, if the reaction from the Swiss press to the EU deal is anything to go by, there are grounds for confidence.

Most Swiss papers observed how many ways the EU has of applying political and economic pressure on Switzerland and concluded that the death knell had been sounded for banking secrecy.

Bern-based Der Bund said: "Experience shows it does no good to continue to play ostrich for years when the rest of the world no longer believes you.

"Swiss bankers should learn to compete without banking secrecy."

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See also:

20 Jun 00 | Business
EU tax compromise agreed
20 Jun 00 | Business
Q&A: EU savings tax dispute
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