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HM Revenue & Customs: European Directive on the Taxation of Savings
Finance Act 2003 introduced legislation to enable the Treasury to make regulations for a scheme to collect information about overseas residents. These regulations implement most of the European Directive on taxation of savings (‘the Directive’). The Directive is intended to counter tax evasion on savings income by providing for automatic exchange of information between Member States on cross-border savings income payments made to EU resident individuals.
Three Member States - Austria, Belgium and Luxembourg - will, as an alternative to exchanging information from the outset, apply a withholding tax during a transitional period. In addition to Member States, certain UK and Netherlands dependent and associated territories and certain third countries will be either exchanging information or imposing a withholding tax.
The Directive takes effect from 1 July 2005.
This paper looks at:
- what the Directive says about exchange of information
- what the Directive says about withholding tax
- how to opt not to have tax witheld
- how to eliminate double taxation
2. What the Directive says about exchange of information
Any relevant payee who receives savings income from a paying agent established in another Member State may have details about them collected and verified by that paying agent. The paying agent will then report that information and information about the savings income payment to its own tax authority, who will pass it on to the tax authority of the country or territory in which the individual is resident (according to the Directive rules). This will help tax authorities ensure that the correct amount of tax is paid on the savings income.
3. What the Directive says about withholding tax
For a transitional period, Austria, Belgium and Luxembourg will withhold tax from savings income payments instead of exchanging information. Some of the other participating countries and territories may also decide to withhold tax initially rather than exchange information. The tax withheld under this system will be in addition to any tax withheld under the territory’s domestic legislation.
However, investors who receive savings income from a paying agent in a withholding country may elect not to have tax withheld or, if withholding tax is charged, they will be able to avoid double taxation, as set out below.
4. How to opt not to have tax withheld
Withholding countries will enable investors to request that tax is not withheld by implementing at least one of two procedures. Individual investors who are tax resident in the UK will be able to make use of these procedures to receive their overseas savings income without deduction of the withholding tax.
4.1 Procedure 1
The individual may authorise the paying agent to report details of the savings income payment to its tax authority, who will supply it to HMRC. The individual will have to follow whatever procedures are prescribed for this purpose by the territory where the paying agent is established.
4.2 Procedure 2
The individual can ask HMRC for a certificate showing:
- their name, address, and a tax identification number (or, if they don’t have one, their date/place of birth)
- the name and address of the paying agent
- the account number in question or some other means of identifying the security
- the period (up to 3 years) for which the certificate is valid
The individual will need to provide information about the paying agent and the source of the savings income to HMRC so that the certificate can be drawn up. The individual then presents the completed certificate to the paying agent, and requests them not to withhold tax from the savings income.
Guidance is available on how to apply for a certificate. HMRC will issue a certificate within 2 months of receiving the request. It will be valid for up to three years.
5. How to eliminate double taxation
In order to make sure that investors are not taxed more than once on the same savings income, investors who have tax withheld under the new scheme rules may claim credit for the tax withheld from their tax authority.
These rules are in addition to the normal rules on double taxation, which will continue to apply in the normal way to any tax withheld in the territory where the original payer of the income is established.
Once the Directive takes effect investors may find that 2 amounts of foreign tax have been withheld from the gross amount of the savings income:
- tax withheld, as now, in the territory where the original payer of the income is resident under that territory’s domestic law
- tax withheld by a paying agent (known in the legislation as ‘special withholding tax’) as part of the new scheme in those countries and territories that opt to withhold tax rather than exchange information.
The UK will ensure the elimination of any double taxation that may occur as a result of the imposition of withholding tax as follows:
- as now, any tax withheld in the territory where the original payer of the income is resident under its domestic law will be credited first against the UK tax payable on the savings income, provided that credit is allowable under UK law or under the UK’s DTA with that territory. It will remain the case that such tax cannot be repaid if it exceeds the UK tax liability on that income;
- the special withholding tax will be credited against the remaining UK Income or Capital Gains tax liability;
- any special withholding tax remaining after the UK Income and Capital Gains tax liability will be repaid to the investor by HMRC.
The Government envisages that investors will be able to reclaim the tax withheld under the Directive either through their tax return or by submitting a claim to HMRC. Self assessment returns for 2005-06 will be amended to allow this withholding tax to be setoff against income tax and capital gains tax, and any repayment claimed.
The Government has included legislation in Finance Act 2004 to complete the implementation of the Savings Directive. The legislation:
- allows the crediting of tax withheld by the paying agent under the new scheme prescribe the order of relief where credit is allowable for special withholding tax against an individuals UK Income or Capital Gains tax liability
- authorises the repayment of any excess special withholding tax credit remaining after exhausting an individuals UK Income or Capital Gains tax liability
- provides for the certificate outlined above