By Huw Jones
BRUSSELS, Nov 6 (Reuters) - Plans to toughen up European Union rules that failed to stop German investors using Liechtenstein to dodge tax are already sparking outflows to other tax havens, a study said on Thursday.
Germany persuaded EU finance ministers in March to speed up a review of the bloc's savings tax rules that tax interest payments EU individuals receive on bank accounts or mutual funds in other member states or in non-EU countries that apply the bloc's rules like Liechtenstein, Switzerland or San Marino.
The rules came into force in 2005 after years of haggling but loopholes have already emerged such as investment trusts in Liechtenstein fall outside the scope of the rules.
EU Tax Commissioner Laszlo Kovacs will propose amending the directive on Nov. 12, but a study by the European Policy Forum think tank suggests the move will backfire.
"Such a move would make it problematic, time-consuming and costly for paying agents to be certain about whether income received from a particular financial product falls within the directive's catchment area or not," the EPC said in a statement.
Loud calls for reform were already prompting investors to shift cash to Singapore, Hong Kong, Dubai and other countries that have not signed up to the EU rules, the study said.
TAX MORE EFFECTIVE
The study calculated that it costs the 1,243 leading banks in the EU and Switzerland 693 million euros ($890 million) to comply with the existing savings tax rules each year and extending the scope of the rules would bump up costs by 682 million euros.
EU governments have found that under the rules, exchanging data on deposits held by a citizen from another EU state was difficult to apply with a number of countries reporting long delays and inaccurate data, the study said.
Belgium, Austria and Luxembourg, refused to adopt the system of information exchange and instead apply a withholding tax so that can keep their tradition of banking secrecy.
A withholding tax can be far more effective than swapping data as it involves handing on real cash, the study said.
Kovacs' proposal will need unanimous backing from all 27 member states to be adopted, as in all EU tax matters. Luxembourg has said it sees no real case for change.
Kovacs' officials have said changes will focus on improving the quality of data collected on accounts held outside a home state.
Investment vehicles similar to those already covered would also be included as well as making sure individuals can no longer avoid tax by handling interest payments through an intermediary that are currently exempt. (Editing by David Brunnstrom & Jan Dahinten)