Tax initiative

Pressure is growing on so-called tax havens, situated in the Caribbean and in Europe. At the meeting of European Union finance ministers in Dublin, six major EU member states, France, Britain, Italy, Poland, Spain and Germany presented a new initiative against tax evasion and tax avoidance.

In the future, the six countries plan to automatically exchange all relevant data on capital income with each other. That will enable fiscal authorities to collect taxes more easily from taxpayers who invest money in the EU.

The sudden momentum came from across the Atlantic, according to British Finance Minister George Osborne, who was responding to a reporter's question in Dublin.

"We actually have a new international standard emerging," he said. "With the countries represented here taking it up and using it as the basis of a multilateral European system, we're turning what was a bilateral US agreement into something approaching a global standard, which we want to obviously see promoted in Europe, but also more widely than that."

Osborne's statement referred to the Foreign Account Tax Compliance Act (FATCA), passed in the US in 2010, which is applied by an increasing number of countries worldwide in bilateral agreements with the US – among them Germany and Luxembourg. Under FATCA, those who don't pass on relevant data of potential American tax evaders to the US authorities are consequentially banned from doing business in the US. And since the US is the world's most important financial center, most countries and their banks have no choice but to accept FATCA.

Austria putting up resistance

Even Switzerland, famous for its banking secrecy, has adopted FATCA in a bilateral agreement with the US. But there has been criticism, with the Swiss daily newspaper the Neue Zürcher Zeitung speaking of a "tax diktat" by the big power, the United States.

The largest EU countries now want to adopt automatic data exchange as a standard for Europe. The last country to put up open resistance was Austria. In Dublin, Finance Minister Maria Fekter of the conservative party ÖVP called it an "attack on banking secrecy."

Banking secrecy has deep traditional roots in Austria and is anchored in the constitution. The proposed data exchange, she criticized, would lead to a "graveyard of data." "It's better to tax at the source," said Fekter. Austria does just that, deducting a tax at the source on returns on interest – in an anonymous way.

Luxembourg's Finance Minister Luc Frieden also criticized the initiative brought forward by the big six. "They want the small EU countries to just follow suit," Frieden said. Nevertheless, on Saturday (13.04.2013), three medium-sized EU member states, the Netherlands, Belgium, and Romania, also decided to join the initiative.

But Austria looks set to give in to pressure from the US, and seems likely to begin negotiations on adopting FATCA. Austria will try and push for an agreement  similar to the one Switzerland has adopted, one which doesn't impose an automatic data exchange, so that the anonymity of bank depositors remains somewhat protected.

Brits put pressure on Cayman Islands

In Dublin, Britain's finance minister announced that the new transparency will also apply to tax havens in Britain's sphere of influence.

"First of all the Crown dependencies, the Channel Islands, the Isle of Man and so on: we have in the past couple of weeks concluded automatic exchanges of information, which are based on the US model, based on the model that we are adopting amongst ourselves here," said Osborne.

"With the overseas territories, like the Cayman Islands and the British Virgin Islands, we are in advanced stages of discussions. But I think they are in no doubt about what we expect of them."

People who want to evade taxes, Osborne added, should know that the hiding places are becoming few and far between.

Limit creative tax avoidance

German Finance Minister Wolfgang Schäuble stressed that the initiative of the six major EU countries isn't limited on returns on interest. It will also be applied to all forms of capital income by companies. In the future, systems that encourage creative tax avoidance, currently legal and present in many EU member states such as Luxembourg and Ireland, will also come under scrutiny.

"When the International Monetary Fund has its spring meeting in Washington next week, we will continue our efforts on a global level," he said. "We want to fight tax evasion through data exchange and we want to fight tax avoidance that happens when someone uses different tax systems or even tax havens. I believe a global movement is emerging, that will find the support of all Europeans."

But not all EU member states agree. Luxembourg benefits from direct investment by US companies, for example, which settle in the Grand Duchy because they benefit from the limited tax burden there, a prime example being online retailer Amazon.

'Surge in appetite' for stricter rules

At the moment, the EU member states are in competition with each other because of such legal tax avoidance systems. Countries like Cyprus were a popular destination for companies to register low-taxed subsidiaries, so-called letterbox companies. In the future, that system should lose its appeal, said Polish Finance Minister Jacek Rostowski in Dublin.

Rostowski explained that Poland has tried to attract big international companies for many years. He wants the multinationals to tax the profits where they make them: in Poland. "As a host country we're always concerned about a reduction of the base for tax. We can only fight tax avoidance in cooperation with other states," he said.

EU Tax Commissioner Algirdas Semeta has urged member states to finally adopt the EU's Savings Directive that was negotiated in 2008. In Dublin, he said he could now see that happening over the coming weeks. But he warned that all questions concerning tax policy require a unanimous vote by all member states.

"The surge in the appetite of member states for progress and action in the fight against evasion is extremely welcome," said Semeta, seemingly surprised by the initiative launched by the six big countries. And yet, it's still up to the member states themselves to determine their tax systems and their tax rates.