The Foreign Account Tax Compliance Act (Fatca), the US tax information sharing act, served as a blueprint for the introduction of Europe’s Directive on Administrative Cooperation 2, or Dac 2, Camille Seillès, secretary general at the Luxembourg Bankers’ Association (ABBL), suggested during an interview with Delano in Kirchberg on 26 July 2023. Dac 2 updated Dac 1, which launched in 2011 and was applicable starting from January 2013. It was initially based on “very targeted” on-demand information requests by the governments.
Early on, noted Seillès, local participants knew that it was a matter of time for the process--which started with on-demand information--to expand to include an automatic exchange of information as it was already hotly debated at the Organization for Economic Co-operation and Development (OECD).
Luxembourg: a low achiever
Luxembourg was subject to a peer review in November 2013. In other words, there was scrutiny on how Luxembourg was applying the rules (Global Tax Forum in Jakarta), with an unfavourable evaluation resulting into the placement of Luxembourg onto a grey list, or list of uncooperative tax havens, by the OECD.
The decision sent shockwaves across the country as it took place during the Luxembourg presidency of the EU council, an embarrassing situation, recounted Seillès. He recalled the European Investment Bank avoiding Luxembourg banks in its financing syndicates on the back of the country not complying with international standards on transparency, and anecdotal examples such as simple retail transactions coming from Luxembourg rejected by correspondent banks in the EU.
Two years for Luxembourg to get a clean sheet
The LuxLeaks affair and its aftershocks such as the Panama Papers, OpenLeaks and the accusations of the European Tax Observatory did not prevent Luxembourg from being removed from the OECD’s grey list almost two years later in October 2015.
Being partially compliant could not have been envisioned […] given the perception it would have communicated.
In the wake of Fatca and the common reporting standard, or CRS, a global standard for the automatic exchange of financial account information developed by the OECD, “the ABBL and its members proactively implemented the standard given the central role of Luxembourg in the bilateral exchange of information,” said Seillès.
Indeed, the “outgoing flow of financial information was dominated by Luxembourg,” as reflected in a 2018 report of the European Commission. The report showed that the grand duchy represented 17% of the accounts and almost 70% of the amounts reported.
The European Commission created a committee (“expert group on the automatic exchange of financial account information”), which ran from 2014 to 2017 and included the French banking federation, the British bankers’ association, the European banking federation and the ABBL, demonstrating the importance of Luxembourg being represented at the table.
Seillès claimed “not having aimed at the implementation ad minima of the CRS but rather to an extent as wide as possible for everyone.” Indeed, Luxembourg could ill afford, for political reasons, to be non-compliant in the implementation of the CRS. “Being partially compliant could not have been envisioned […] given the perception it would have communicated.”
The cost of conformity
Banks and local authorities have deployed the labour and the financial resources to conform with the directive. “It is estimated that the cost for the implementation of Fatca and CRS were around €150m to our members with recurrent charges of €10m to €15m per year,” said Seillès. The tax department set up a dedicated division named “information exchange.” He noted that Luxembourg is one of the countries that invested the most on financial transparency.
Dac 2, adopted in 2015 but applicable in 2016, introduced the automatic exchange of information on bank accounts held by non-residents in European banks. “I better not imagine what would have been the negative impact on the economy should Luxembourg have insisted on maintaining banking secrecy [on non-residents],” said Seillès. Importantly, banking secrecy still applies for residents.
Updated, 13 September at 1:05pm, to clarify that Fatca served as a blueprint for Dac 2, to clarify the timing of Dac 1, and to clarify Camille Seillès’s statement regarding the perception of partial compliance.