Understanding the enhanced exchange of information on tax matters between Monaco and the European Union (TAXUD Agreement)

This publication is dedicated to the background to the Protocol of 12 July 2016 amending the Agreement of 07/12/2004 between the Principality of Monaco and the European Community providing for measures equivalent to those laid down in Council Directive 2003/48/EC on taxation of savings income in the form of interest payments. Monaco initialled the text on 22 February 2016 and it was made enforceable by Sovereign Order 6.207 of 16 December 2016,

The revised Agreement (also known as TAXUD[1]) is aligned with the OECD/G20 global standard, implemented by EU Council Directive 2004/107/EU. It aims to improve international tax compliance through the introduction of automatic and reciprocal exchange of financial account information from 09/2018, subject to confidentiality, protection of personal data, and other safeguards limiting the use of the information exchanged. The Agreement will continue to allow the exchange of information on request between Monaco and the Member States of the European Union.

What is the basis of Monaco's cooperation with the European Union in its fight against harmful tax competition?

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In the field of mutual administrative assistance in tax matters, the Principality of Monaco has committed to the automatic exchange of information on financial accounts from 09/2018, with the OECD on the one hand[2], and the European Union on the other.

Negotiations with the European Union since 2013[3] have resulted in the Protocol amending the Agreement on the taxation of savings income of 07/12/2004[4]. The Agreement, initially based on Council Directive 2003/48/EC[5]of 03/06/2003, is aligned with Council Directive 2014/107/EU of 09/12/2014, which extended cooperation between Member States' tax administrations to the automatic exchange of information relating to financial accounts.

In order to fully understand the legal framework of the revised Agreement, it seems appropriate to recall the foundations of Monaco's cooperation, part of the evolution of European legislation on direct taxation. The subsequent issue of the Principality's removal from the blacklists of so-called 'non-cooperative' countries of certain EU Member States will also be addressed. NB: since this article, written in 2016, Monaco has been removed from these lists.

1. Monaco's cooperation in the EU's fight against harmful tax competition

Why has the Principality, a State outside the European Union, implemented (since 01/07/2005 [6]) measures equivalent to those established by the Savings Directive 2003/48/EC?

What information exchange mechanisms were applicable under the (previous) Agreement of 07/12/2004 on the taxation of savings income?

1.1. The foundations of the 2004 Agreement

Private savings income in the form of interest payments[7] is taxable income for residents of all EU Member States. However, in the absence of coordination between national tax systems, EU residents were often able to avoid taxation on interest received in a State other than that of their tax residence.

The Savings Directive 2003/48/EC is intended as a remedy for the distortions created by tax competition between Member States of the European Union, and for the consequent flight of capital to other European countries outside the EU. If the scope of the European measures had been solely intra-EU, their effectiveness would have been undermined from the outset. The entry into force of the Savings Directive 2003/48/EC was therefore made conditional on the conclusion of bilateral agreements providing for equivalent measures with Monaco, Andorra, Liechtenstein, San Marino and Switzerland[8].

The 2004 Agreement with Monaco allows the taxation of interest payments made by economic operators established on Monegasque territory ("paying agents"[9]) to individuals who are resident for tax purposes in a Member State of the European Union ("beneficial owners"[10]).

In principle, paying agents make the deductions at source (at a rate of 35%[11]), which they pay to the Direction des Services Fiscaux by 31/03 of the year following the interest payments. The attached RAS Declaration shows the breakdown of the amounts deducted between the Member States of residence of the beneficial owners[12].

Monaco transfers three-quarters of the revenue to the States of EU residents, and keeps the remaining quarter[13]. This sharing system "has been a significant source of revenue for the Principality in recent years"[14].

1.2. Exchange of information under the 2004 Agreement

By way of exception, the beneficial owner may opt out of the withholding tax by choosing the "voluntary disclosure" procedure. With his express authorisation, his paying agent provides the Direction des Services Fiscaux with all interest payments made to him, as well as information identifying the beneficial owner (residence, account number or debt security) via a Declaration of information intended to be communicated to the State of residence.

In addition, the 2004 Agreement provides that the Principality may exchange information with EU Member States upon request, in the event of tax fraud[16]. To this end, Monaco had to introduce into its criminal law the specific offence of tax fraud, the scope of which is limited to savings income paid in the form of interest[17].

Information is provided when the facts are the subject of proceedings and not on the basis of mere suspicion, in accordance with the procedures and guarantees set out in Article 12 of the Agreement and Ordinance No. 101 (verification of compliance with the Agreement of the conditions for granting information; procedures for gathering information; rights of the person concerned; transmission of information to the foreign authority).

According to the OECD Global Forum's assessment for the period 2009-2012, Monaco has regularly exchanged information on savings income with Germany, Belgium, Italy and the United Kingdom (1,000 items of information in 2010, 837 in 2011 and 922 in 2012).[18]

2. Towards closer cooperation from 2018 and Monaco's removal from the EU blacklists

Why did the European Union decide to withdraw the Savings Directive as amended on 24/03/2014[19], and ultimately align the 2004 Agreement with Council Directive 2014/107/EU mandatory automatic exchange of information in the field of taxation [20]?

Why does the Principality still appear on the blacklists of "non-cooperative" countries of nine European Union Member States? NB: since this article, written in 2016, Monaco has been removed from these lists.

2.1. From the 2014 Savings Directive to the Directive 2014/107/EU on mandatory automatic exchange of information in the field of taxation

The experience of the first three years of application of the Savings Directive 2003/48/EC has highlighted its shortcomings, linked to investor behaviour and the evolution of savings products. As its scope was delimited, it became apparent that natural persons resident in the EU could circumvent it through an interposed entity or legal structure, by using the international network of financial institutions (branches, subsidiaries, associated companies, holding companies), by using financial instruments providing income substantially equivalent to interest.[21]

Following the adoption of a proposal to update the Savings Directive, the European Commission recommended in 2011 to start negotiations with Monaco, Andorra, Liechtenstein, San Marino and Switzerland to improve the agreements on the taxation of savings income in line with the development of the OECD global standard on exchange of information[22]. The negotiating mandate adopted by the Council on 14/05/2013 agreed to promote the automatic exchange of information as a future international and European standard.

Corrections were made to the Savings Directive in 2014[23]. However, it was finally repealed by the Council on 10/11/2015[24], due to the overlap of its scope with that of Directive 2014/107/EU of 09/12/2014 [25], which extended the mandatory automatic exchange of information to interest, dividends and similar types of income[26].

The Protocol of Amendment between Monaco and the European Union aligns the 2004 Agreement with the standard for automatic exchange of information concerning financial accounts provided for in the extension of the DAC Directive[27], which transcribes the OECD global standard. In other words, the Protocol of Amendment constitutes the legal basis for the implementation of the OECD global standard in relations between Monaco and the European Union.

From 2018, Monaco will be able to communicate, systematically (without prior request)[28] and at predetermined regular intervals, predefined financial information[29] concerning the financial accounts of individuals or entities identified as EU residents, managed by reporting financial institutions[30] on its territory.

As the European standard is the one recognised at international level, the comments of the Common Reporting Standard (CRS) and the Model Agreement between Competent Authorities (Model CAA) developed by the OECD will be used to implement the provisions of the revised Agreement[31].

2.2. The issue of EU blacklists

On 17/06/2015, the European Commission published a blacklist of 30 "non-cooperative tax jurisdictions" (known as the "Moscovici list") reflecting the situation as at 31/12/2014, on which the Principality appears. This is the first immediate measure taken under the "Action Plan for fairer and more efficient business taxation in the EU"[32].

The method used to list non-EU countries has been heavily criticised. The pan-EU list, drawn up on the basis of the work of the Platform for Good Governance in Tax Matters[33], merges the blacklists drawn up independently by 18 Member States according to non-harmonised selection criteria (partly common and partly specific)[34], some of which have been criticised for not being up to date. Of the 85 non-cooperative jurisdictions listed, the Commission selected those that appeared on at least 10 of these lists. The list does not distinguish between countries that have (like Monaco in 10/2014) or have not committed to the new global standard on the automatic exchange of information[35].

Within the framework of the OECD and the Global Forum, it was recalled "that in terms of cooperation, only the assessment established by the Global Forum is admissible, and that several countries cited in the exercise conducted by the EU fully, or for the most part, comply with the applicable standards and have committed to adopting the automatic exchange of information"[36]. Monaco's system and practice were assessed as "substantially compliant" with the international standard in 2013[37].

The pan-EU list has been updated to reflect the situation at 31/12/2015. As far as Monaco is concerned, it was stated on this occasion that negotiations concerning the agreement on the automatic exchange of information "are currently at an advanced stage".

The Principality still appears to be listed by 9 EU Member States (Belgium, Bulgaria, Croatia, Greece, Latvia, Lithuania, Poland, Portugal and Spain)[38]. The impact will be felt above all "in terms of image"[39], and the Princely Government made it clear when it initialled the Protocol amending the 2004 Agreement "that Monaco's removal from these lists goes hand in hand with this step forward in the fight against fraud and evasion"[40]. NB: since this article was written in 2016, Monaco has been removed from these lists.

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NOTES:

[1] The European Commission's Directorate-General for Taxation and Customs Union defines strategic initiatives with a view to their adoption by the Commission. Among other tasks, it draws up the direct taxation strategy aimed at limiting distortions between the different tax systems of the EU Member States, and works at international level to improve transparency and the exchange of information.

[2] Monaco signed the https://www.coe.int/fr/web/con... on 13/10/2014, and then made a commitment at the Global Forum in Berlin on 28-29/10/2014 to implement the Common Reporting and Due Diligence Standard. Monaco is the 76th jurisdiction to have signed the Multilateral Agreement between Competent Authorities, on 15/12/2015. See our Newsletter #8 (pp. 2-3) and our Legal Panorama 2015 (pp. 27-28).

[3] Press release issued by the Government of Monaco on 22/02/2016.

[4] Order no. 100 of 20/06/2005 implementing the Agreement signed in Brussels on 07/12/2004

[5] All directives are systematically adopted by the Council of the EU. The involvement of the European Parliament varies (assent, consultation, co-decision). "A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods" (Article 288 of the Treaty on the Functioning of the EU).

[6] Article 17 of the Agreement and Article 13 of Order 101 of 20/06/2005 implementing the Agreement.

[7] Defined in Article 6 of the 2004 Agreement. The taxation of pensions and insurance benefits is excluded from the scope of the Agreement.

[8] The Savings Directive is based on the conclusions of the Helsinki European Council (10-11/12/1999) and the reports of the ECOFIN Council (composed of the Ministers of Economy and Finance, and responsible for economic policy, taxation, financial markets and capital movements, as well as economic relations with non-EU countries).

[9] Paying agents referred to: banks, natural and legal persons, partnerships and subsidiaries of foreign companies which, in the course of their business, accept, hold, invest or transfer assets belonging to third parties and make/allocate interest payments for the immediate benefit of a beneficial owner (Article 4 of the Agreement).

[10] Beneficial owners: individuals who receive interest payments or to whom an interest payment is allocated for their own benefit (article 2 of the Agreement).

[11] Since 01/07/2011 - Article 6 of Ordinance no. 101.

[12] Article 7 of Order no. 101. In order to protect their banking secrecy, Belgium (until 2011), Austria and Luxembourg have also introduced a withholding tax, while the other EU Member States have opted for the automatic transmission of information.

[13] Article 8 of the 2004 Agreement.

[14] Jean Castellini, Government Councillor for Finance and the Economy - Interview by Noël Mettey, La Gazette de Monaco, No 490, 02/05-04/06/2015, p. 29.

[15] Article 9 of the Agreement and Article 8 of Ordinance No 101.

[16] Article 12 of the Agreement.

[17] Law no. 1. 300 of 15/07/2005: "use of a false, falsified or inaccurate document with the aim of evading or attempting to evade total or partial payment of tax" (Article 2); fraudulently obtaining a "total or partial refund of tax" (Article 3); intentional non-collection or partial collection of withholding tax (Article 4); intentional misappropriation of withholding tax (Article 5); related offence of concealment of tax fraud (Article 6).

[18] OECD (2013), Global Forum: Peer Review Report: Monaco, Phase 2 - Practical Implementation of Standards.

[19] Council Directive 2014/48/EU of 24/03/2014.

[20] Directive 2014/107/EU (DAC 2) amends Council Directive 2011/16/EU of 15/02/2011 on administrative cooperation in tax matters (DAC). All the mechanisms for exchanging information between Member States are included (on request, spontaneous, automatic, participation in administrative enquiries, simultaneous controls, notification of tax rulings).

[21] First Report from the Commission on the application of the Savings Directive 2003/48/EC, 15/09/2008.

[22] European Commission Recommendation of 17/06/2011.

[23] Council Directive 2014/48/EU of 24/03/2014: redefinition of the paying agent in order to capture the reality of the market which involves several participants in the payment of interest; inclusion of beneficiaries of entities or untaxed legal arrangements established outside the EU; extension to products economically equivalent to interest.

[24] Directive 2015/2060/EU. Commission repeal proposal of 18/03/2015.

[25] The DAC 2 Directive expressly provided that in the event of overlap with the scope of the Savings Directive, the DAC 2 provisions should prevail.

[26] Amendment of Council Directive 2011/16/EU of 15/02/2011 (articles 3, 8, 20, 21, 25 and addition of two annexes). The DAC Directive provided for the transition to automatic exchange on 01/01/2015 for five categories of income: professional income, directors' fees, life insurance products not covered by the Savings Directive, pensions and income from immovable property.

[27] See Annex 1 of the DAC 2 Directive, Section I and Section VIII (D) (4) (c).

[28] Exchange on request will also be possible, in accordance with the same procedure as that provided for in the bilateral agreements based on the OECD model.

[29] Balance or value held in accounts; amount of interest, dividends and similar types of income; proceeds from the sale or redemption of financial assets.

[30] Monaco reporting financial institutions are those resident in Monaco, or whose branch is established in Monaco.

[31] General obligations and due diligence procedures to be followed by financial institutions, information technology arrangements to ensure legibility and protection of personal data, administrative procedures.

[32] The aim of the pan-EU list is to strengthen the EU's response to external threats to its members' tax base. See the explanations of the European Commissioner, Pierre Moscovici, "What is the purpose of a list of tax havens?", 10/07/2015.

[33] The Platform is made up of the tax authorities of the EU Member States and 15 organisations from civil, professional and tax circles. Representatives of candidate countries and the OECD may be invited as observers. It assists the European Commission in developing initiatives to promote good governance in tax matters in third countries, counter aggressive tax planning and remedy double taxation situations.

[34] Compliance with standards of transparency and exchange of information, absence of harmful tax measures and other national criteria.

[35] The vast majority of the countries listed are in the Caribbean and Central America.

[36] Pascal Saint-Amans, Director, Centre for Tax Policy and Administration and Monica Bathia, Head of the Global Forum Secretariat, Letter to Global Forum members.

[37] See our Newsletter #8 (p. 6).

[38] The conclusion of the Bilateral Agreement with Italy on 02/03/2015 resulted in Monaco's removal from its blacklists. See our publication on Exchange of information in tax matters between Monaco and Italy.

[39] Reaction from the Princely Government gathered by Raphaël Brun, "Un impact en termes d'image", Monaco Hebdo, 01/07/2015.

[40] Jean Castellini, Monaco Government press release, 22/02/2016.

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