Conflicting reports over Cayman Islands commitment to EU Tax Directive

Wednesday, February 11, 2004

BRUSSELS, Belgium: At a meeting of European Union finance ministers on Tuesday, the British Chancellor Gordon Brown briefed his EU counterparts on negotiations with Britain's offshore territories, such as the Cayman Islands, which has been the only British territory still holding out against coming in line with new EU savings tax rules.

But Brown again signalled a get-tough approach, warning that Britain could use legislation to force the island's authorities to come into line. London has rarely used such measures, a notable exception being over capital punishment.

"The Cayman Islands will in our view wish to come in line with a voluntary agreement, but if not we will be prepared to use the power of the law to deal with it," said Brown.

This statement contrasts with a report in the Financial Times over the weekend that the Cayman Islands have now conditionally agreed to comply with its terms. The Cayman Islands had been the only UK dependent territory holding out against the directive because of fears its financial services industry would be damaged.

The EU directive obliges countries to exchange information on savings held by non-residents, so that they can be taxed in their country of origin.

However, the UK territories have made it clear they want to ensure all rival offshore centres due to participate in the directive comply with it at the same time.

The Cayman Islands government has so far neither confirmed nor denied the accuracy of the Financial Times report.

Meanwhile, the EU vowed Tuesday to step up pressure on Switzerland -- long famed for its secret bank accounts. EU finance ministers, who are increasingly frustrated at Bern's refusal to agree to the new rules, pointed out that "tax havens" such as Monaco, Andorra and Liechtenstein are not posing as much of a problem as Bern.

Pressure is growing notably as a June deadline approaches for a deal to be struck, to allow for a harmonized "directive" -- or EU law -- on taxing savings to come into force on January 1 next year.

"The strong and unanimous message of the finance ministers today is to conclude the negotiations with Switzerland as quickly as possible," said Irish Finance Minister Charlie McCreevy, whose country currently holds the EU reins.

The new EU rules, aimed at closing down hideaways for savings out of reach of the taxman, were agreed last June. But they can only be implemented if an accord on similar rules is reached with third countries including Switzerland.

EU ministers are particularly irate that the Bern government is linking agreement on savings tax with parallel negotiations on the EU's Schengen system of free movement of people.

Switzerland is also pressing for an exemption from cooperation in fight against fiscal fraud -- a demand rejected point-blank by the EU.

"The unanimous view of member states is to not have any coupling with any other item," the Irish minister told reporters after regular monthly talks in Brussels.

That view was echoed by French Finance Minister Francis Mer, who called in no uncertain terms for EU tax commissioner Frits Bolkestein -- leading the negotiations for the EU -- to step up pressure on Bern.

"There is no question of linking subjects which have nothing to do with each other," he said, calling on Bolkestein to "put the screws on Switzerland in the coming weeks."

Under the new savings tax system, EU states Luxembourg, Belgium and Austria have all retained their right to banking secrecy, in exchange for a withholding tax applied at source. Switzerland is banking on a similar arrangement.

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