Uncertainty over EU Tax Law

Duncan Nicol, Director of the
Tax Information Authority

Monday,  October 17, 2005

It has been over three months since the bilateral agreement to comply with the European Savings Directive came into effect on 1 July and some industry experts believe that it will have virtually no effect on the financial sector here in the Cayman Islands, because the EU Savings Directive and the mirror Cayman bilateral agreement only applies to interest income on savings accounts for individuals, not companies. 

Moreover most individuals will, according to financial experts here, get around the legislation by setting up a company, trust or other legal entity, where the individual is the beneficial owner. 

And for the most part, that is what wealthy individuals have been doing for years even without the EU Savings Directive. Consequently, there appears to be a significant effort and expense from the private and Government sector to comply with the new EU Savings Directive, but with no real impact.

As the bilateral agreement is unlikely to have any significant impact, questions have been asked, why is the European Union and consequently the Cayman Islands Government going through this charade? 

Especially, if this legislation was implemented to collect taxes that are leaking from EU member states, when it appears to be so easy for wealthy individuals to get around the directive.

However, the Director of the recently established Tax Information Authority, Duncan Nicol said in reality no one can actually know for certain how the law will affect individual investors here until reports come in from the private sector.

“At this stage, I don’t know what the qualitative impact is going to be until we get the first report,” said Mr Nicol. 

The first reporting period will cover 1 July through 31 December and those first reports are due to be delivered to the Tax Information Authority on 31 May. Then the authority will have one month to gather those reports and send them to the relevant EU member states. 

He explained that the objectives of the Tax Information Authority for the bilateral agreement are to receive and report the information from paying agents, for example, banks and other financial institutions.

These financial institutions will provide information on interest payments on savings accounts for individuals who reside in the EU member states. The directive only applies to EU nationals who are residing in an EU state, it does not apply to EU nationals who live and work in the Cayman Islands. 

Mr Nicol added the Tax Information Authority will not be analysing the data that is down to the respective EU states to deal with.

“As the Director of the Tax Information Authority we are not involved with policy. We are only concerned with the operations in implementing the legislation. There is no anaylsis obligation in the law,” he said. 

The Tax Information Authority was recently formed under the supervision of the Financial Secretary of the Portfolio of Finance and Economics to implement international agreements regarding tax information, specifically, the bilateral agreements for reporting savings income for EU members and the US. 

The EU Savings Directive does not apply to the Cayman Islands per se. But the Cayman Islands as well as other overseas territories and other tax neutral jurisdictions implemented bilateral agreements in cooperation for the EU Savings Directive including the Dutch dependencies, San Marino, Switzerland, Liechtenstein, Andorra and Monaco. The Cayman Islands bilateral agreement states that information on savings income will be provided rather than a withholding tax. 

Mr Nicol emphasised the Tax Information Authority is not a separate legal identity such as the Cayman Islands Monetary Authority or the Health Services Authority.

It uses the term ‘authority’ so that regulatory bodies in other countries understand it is the ‘competent authority’ to provide the tax information to EU member states.

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