Derelict Directive

By Global Tax Weekly

Switzerland is probably fairly happy that international attention this week was being devoted to a French bank, for a change, and newly-announced figures for the money the country generated from applying the EU’s Savings Tax Directive may also have created a small frisson of satisfaction among the country’s financial leaders. For others, who don’t understand why, at first blush USD570m doesn’t seem to be a derisory amount of money to have extracted through a tax of 30 percent on interest payments, even if it was down 20 percent on last year, but hold hard: while there are no robust figures for total Swiss assets under management, a semi-official figure published last year suggests that they amount to about USD6 trillion, representing more than a quarter of global AUM. USD570m is 30 percent of USD1.9bn, which is an astronomically small proportion of USD6 trillion. Try it on your calculator: it’s far less than a tenth of a percentage point. In other words, the Savings Tax Directive has been a total failure, and as will no doubt be the case with FATCA, the costs associated with implementing it are certainly greater than the returns it has generated. Tax authorities don’t care about that: if it costs UBS 10 Swiss Francs to provide 1 Franc in extra tax, then they are still happy, not noticing the appalling waste of productive resources that has been inflicted on the private sector.

Now of course, the EU’s Taxation Commissioner Algirdas Šemeta, himself one of the biggest single economic disasters to have been visited on the reeling European Union since its foundation, is ready with answers:

1. The revised Savings Tax Directive, which all member states have agreed to, will plug many of the holes in the first version of the Directive. Except that it has not been agreed until all third-party states agree to it, and many of them, including Switzerland, probably won’t do so. Even if they do, savers (and banks) will quickly find ways around the new Directive just as effectively as they did with the last Directive.

2. Withholding taxes were only ever intended as a stop-gap measure while exchange of information regimes were installed worldwide, ensuring that the returns from all revenue-yielding assets are reported to home-country tax authorities. This is a true statement, as far as it goes, but that is not very far, because there is no world-wide understanding that beneficial ownership should be recorded, and it is a simple matter for the ultimate owners of assets to obscure true ownership. FATCA is an attempt to remedy that situation, as was the attempt by the Loch Erne G8 to establish acceptance of the need for beneficial ownership registers. But after initial agreement on such a goal, it has quickly become apparent that no country is prepared to hobble its investors in such a way, and least of all the United States, which doesn’t even have a national register of companies.

Now, before this begins to sound like a panegyric in favour of tax cheating, let us be clear: the problem here is that no system short of 100 percent state control will be successful in imposing high taxes on individuals, and even that eventually fails comprehensively, as we saw with the USSR. People will not accept high taxes, not least because they are inevitably associated with high levels of state corruption or incompetence, and usually both at once. Human nature simply does not tolerate such an equation, and apparent exceptions, such as the Scandinavian democracies, operate only at the level of wage-slaves, who have no more choice than the residents of Omsk in 1960. All Norwegian ship-owners are based in Greece, Cyprus, the Isle of Man, or Vanuatu.

I am as bored with saying it as you are probably with hearing it: there is only one solution, which is to reduce government expenditure and taxes, hand in hand. No country in Europe is doing this, despite all their bleating to the contrary; and until they (or rather, their benighted citizens, who keep re-electing the same ineffectual leaders) understand this, there will be no salvation for Europe.

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