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The Jersey Evening Post

August 20, 2002

Island hit by US tax blow

HOPES that the USA would undermine the European Union's directive on the taxation of savings income, which could damage the Jersey finance industry, have been dashed.

The USA is now proposing to introduce regulations along the lines of the EU's draft directive on taxation of savings income.

If the regulations are approved, the US treasury will agree to exchange information on the interest earned in US bank accounts by residents in 16 countries, including the UK and a number of EU member states.

Tax specialists say that the proposal is an indication that the US is indeed willing to compromise over the EU directive.

This contradicts reports earlier this month from the Washington-based fringe pressure group Center for Freedom and Prosperity which suggested that the USA would refuse to go along with EU tax measures. Representatives of Jersey's finance industry are watching the situation closely, as any change to US policy could alter the Island's future position in the financial services markets. Although the Island is not part of the EU, it is under pressure from the UK government to comply with the package as a dependent territory.

Earlier this year the Island agreed to automatic exchange of information on the savings income of EU residents, but only if the same measures are adopted by all EU members and 'equivalent' measures taken by the so-called 'third countries', including the USA and Switzerland.

There had been suggestions that if America did not co-operate, the EU would be forced to abandon its tax package plans, including the Code of Conduct requiring dependent territories, including Jersey, to ditch so-called 'harmful' tax measures.

But John Riva (pictured), tax partner at KPMG, said that the latest US treasury proposals appeared to confirm that the taxation of savings directive was still very much a live issue.

Mr Riva said that the European Commission now had to decide whether it was prepared to accept the American commitment as an 'equivalent' measure to that of EU member countries.

'What is meant by equivalent measures has not been defined anywhere, and the EU has provided no guidance on how this term should be interpreted,' he said.

'It depends on the political will of EU member states, but my prediction is that as the deadline of 31 December approaches, a more lenient interpretation will be given.'

Jersey Finance chief executive Phil Austin said: 'Interestingly, of the 16 countries with whom America say they will exchange information, Switzerland isn't one of them.

'We have said what we're going to do - if everyone else plays ball on this, we shall exchange information. That decision was taken after lots of consultation with the finance industry. If it happens, it happens.

'America has been unwillingly brought into the savings tax directive by Europe. None of this is about economics, it's all about politics - and that can change from day to day.'

by Christine Herbert

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