Effective since 2005, the savings tax directive seeks to ensure that paying agents either report interest income received by taxpayers resident in other EU member states or levy a withholding tax on the interest income received. The Commission proposal seeks to tighten the directive, so member states can tax more interest payments channelled through intermediate tax-exempted structures.

The EC proposes to extend the scope of the directive to forms of income obtained through investments in some "innovative financial products" as well as investments in certain life insurances products. It also proposed to simplify the technical operation of the directive to make it more "user friendly and efficient."

Laszlo Kovacs, Commissioner for Taxation and Customs, said: "The first report on the operation of the savings tax directive concluded that the directive, although effective within the limits of its scope, can be easily circumvented. The current scope of the directive needs to be extended, in order to meet our goal of stamping out tax evasion, which affects the national budgets and creates disadvantages for the honest citizens."

At present, it is relatively easy for individuals to circumvent the rules of the savings directive by using interposed legal persons or arrangements, such as foundations or trusts, which are not taxed on their income – something that the Commission has long acknowledged.

With regard to interest payments made by paying agents (banks, financial institutions, independent professionals, etc.) established in the EU to certain intermediate structures established outside the EU, the Commission proposes that paying agents in the EU apply the provisions of the directive (exchange of information or withholding tax) at the time of the payment to the intermediate structure, as if this payment was directly made to the individual.

Concerning payments of interest to certain intermediate structures established within the EU, including some non-charitable trusts and foundations, those structures will be always obliged to act as a “paying agent upon receipt” under the proposed new regime. This means that the provisions of the directive must be applied by these structures upon receipt of any interest payment, no matter where they are established and regardless of the actual distribution of any sums to the individual beneficial owners. The suggested definition of "paying agent upon receipt" includes all entities and legal arrangements (trusts, foundations etc) which are not taxed on their income under the general rules for direct taxation in their Member State of residence or establishment.

The savings tax directive can also be circumvented by using financial vehicles other than a classical savings account in a bank. To combat this, the Commission proposes extending the scope of the directive to income from securities which are equivalent to debt claims and life insurance contracts whose performance is strictly linked to income from debt claims.

In addition, the Commission proposal seeks to ensure a level playing field between all investment funds or schemes independently of their legal form. This means that income obtained from those investment funds by individuals resident in the EU will be subject to effective taxation.

The savings tax directive has applied in 42 jurisdictions since July 1, 2005. These include 27 member states, 5 non-EU 'third countries' (Switzerland, Liechtenstein, Monaco, Andorra and San Marino) and 10 dependent and associated non-EU territories (Anguilla, Aruba, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Montserrat, the Netherlands Antilles and the Turks and Caicos Islands).

Following the request of the Ecofin Council, the European Commission started discussions with selected Asian financial centres earlier this year regarding the application of the directive, namely Hong Kong, Singapore and Macao. Formal negotiations are also expected to take place with Norway, at its request, whilst other jurisdictions like Bermuda and Iceland have shown interest in participating in the savings taxation arrangements.