Ireland will apply the exchange of information rather than the withholding tax option when EU-wide interim arrangements to deal with tax evasion and money laundering by individuals come into effect, the Department of Finance has told The Irish Times.
Financial industry sources had been concerned that tax measures agreed by the EU finance ministers in Portugal this week could drive some Irish investment bond business to Switzerland and offshore markets. This would happen, they suggested, if the Government opted to introduce a withholding tax in the five-year interim period before full implementation of the new tax rules.
The new system involves the sharing of information on non-resident savings and investment accounts between national tax authorities within about seven years. But it is the interim arrangements which could have caused problems here.
Member-states had been considering for about two years an option known as "co-existence", of either taxing non-resident account-holders at a minimum rate of withholding tax or of supplying information on their accounts to their tax authorities.
The final terms agreed in Portugal provided for a system based exclusively on exchange of information between tax authorities. Britain had argued strongly against the withholding option on the grounds that it was too blunt an instrument and would drive London's international bond business out of Europe.
However, the agreement cannot be implemented unless third party countries such as Switzerland, the US and offshore tax havens agree by December 31st, 2001, to become involved in the information exchange between tax authorities.
Under the terms agreed, if "sufficient reassurances" are obtained from third countries not later than October 2002, a five-year phase-out of banking secrecy in EU countries would become mandatory. Sources said this wording was open to different interpretations.
In this interim period, EU states would have a choice of passing information or imposing a minimum withholding tax.
Because the withholding tax would only be a temporary measure, there is "no good reason" to bring it in and Ireland will go the information exchange route, according to the Department source.
He said Austria and Luxembourg had decided to introduce a withholding tax in the interim period. Belgium, Greece and Portugal had yet to decide what to opt for while the other EU states would go the information exchange route.
With the substantial content of the framework for the directive due to be completed by the end of the year, agreeing a minimum level of withholding tax throughout the EU remains a difficult issue.
Setting an appropriate level is essential because countries applying the tax will not be supplying information to the tax authorities in other states. They could use a low rate to entice funds out of states which are disclosing information, the Department source explained. A rate of 20 per cent was rejected by Luxembourg.
The new rules will apply to any interest earning security or deposit held by a non-resident in the Irish market. Ordinary non-resident savings accounts held in the Irish credit institutions will be affected.
Central Bank figures show that, at the end of April, there was €11.6 billion (£9.2 billion) held by residents from other EU states in Irish credit institutions together with €16.7 billion from residents in states outside the EU.
No figures were available on the amount of funds invested by non-resident individuals in Irish investment bonds but sources said the business was "significant" both inside and outside Dublin's International Financial Services Centre.
Financial service sector sources are sceptical that the plans will ever be implemented, largely because of the difficulty of getting agreement from third party countries on an information sharing arrangement. Without this agreement, implementation of the arrangements would only lead to a flight of capital out of the EU, they argue.
