|European finance ministers spent 13 years arguing over EU-wide interest taxation before finally reaching an agreement last week. The bad news for tax evaders: From next year, tax havens within the EU and probably also in third countries such as Switzerland are supposed to dry up. Tax dodgers now have to think about whether and when to repatriate their money to Germany.
From January 1, 2004, EU members will either report the interest income of EU foreigners to the tax authorities in their home country or levy a withholding tax, initially 15 percent but rising to 20 percent from 2007 and 35 percent from 2010. Luxembourg, Austria and Belgium will introduce this tax and in return be allowed to uphold their banking secrecy laws.
All other EU countries will in the future send notifications to the tax authorities in the account holder's home country. The Channel Islands have not yet decided which camp to join. Switzerland, Liechtenstein, Monaco, Andorra and San Marino are also supposed to adhere to one of these models. The EU hopes to have largely completed negotiations with these countries by the end of March.
The tax havens Switzerland, Liechtenstein, Luxembourg and Austria, which are very popular with Germans, will thus be partly closed off from next year. Anybody who has hidden his money from the long arm of the German state in one of these countries now has several options.
Strategy 1: If nothing changes, he will see 15 percent deducted from his interest income initially, then 20 percent and finally 35 percent, and the German tax authorities won't know about this income. From 2010, he will then actually pay a higher tax than he would in Germany, which currently plans to introduce a flat tax on interest income of 25 percent, but also plans to give up its banking secrecy legislation.
Strategy 2: Tell the tax authorities about the money, and leave it in the third country or bring it back to Germany. A 25 percent tax would apply, but the authorities may take a closer look at past transactions - and undeclared income would be taxed retrospectively. Tax evaders can benefit from the planned amnesty if they pay 25 percent tax on any previously undeclared interest income by 2003 or 35 percent by 2004. But those who legalize previously undeclared income don't only have to pay back tax. This income will also be factored into calculations of unemployment benefit and potentially social payroll withholdings.
Strategy 3: Since withholding taxes in the tax havens will remain lower than in Germany until 2010, tax evaders may consider postponing the repatriation of their money until 2009, but in that case will not benefit from the amnesty and would be facing tax dues at the much higher personal income tax rate.
Strategy 4: Secretly repatriating large sums is a highly risky endeavor because the elimination of the banking secrecy law will give the authorities easy access to bank account data, probably also retrospectively.
Strategy 5+6: The EU plans aren't perfect. For one, there will still be tax havens outside of Europe where investors can move their money, even if this entails additional organizational effort. In addition, the EU authorities will only register interest income from bonds and funds, not from foundations, dividends and share price gains, all of which already are or will be taxable in Germany. No doubt, banks will therefore soon be offering products based largely on stocks or no-coupon bonds.