Brussels has launched a drive to close loopholes in a two-year-old European savings law that has been sidestepped by offshore tax avoiders.

Laszlo Kovacs, EU tax commissioner, has begun consulting the savings industry on a range of measures to tighten up the savings directive, which is riddled with exemptions.

The directive, introduced in July 2005, is meant to flush out tax evaders and require them to pay tax to their home country on earnings from savings held in third countries. Non-EU countries such as Switzerland and Liechtenstein also agreed to apply a withholding tax.

The early evidence is that the directive is failing to bite. Switzerland, the world's biggest offshore financial centre, raised only €100 million in the first six months of the law's operation.

Mr Kovacs, meanwhile, is worried that some savers have moved to Hong Kong and Singapore - not covered by the directive - and he is trying to arrange reciprocal deals with them.

Mr Kovacs has to report on the operation of the directive by June 2008, but some EU officials say he could make proposals before that date to close some of the more obvious loopholes.

Whether he can persuade EU member states and third countries to give their unanimous agreement is questionable: diplomats say big offshore financial centres like Switzerland, Luxembourg and Austria only agreed to the directive precisely because it contained so many loopholes.

A European Commission working document, presented to industry experts last month, proposes blocking the main loopholes by extending the directive's reach to include companies and trusts. It also floats the idea of blocking the deliberate routing of interest payments through branches of banks located in jurisdictions not covered by the directive, whose reach also includes several Caribbean islands, the Channel Islands and the Isle of Man.

The working paper suggests that the tougher definition of "beneficial ownership" used for anti-money laundering obligations should be adopted for the savings directive. This would bring discretionary trusts and companies into its scope.

It suggests imposing a new obligation on EU banks to report - or withhold - interest payments made through non-EU branches.

Banks are currently able to assist valued customers intent on avoiding the directive by paying interest through other jurisdictions, while providing access to the untaxed income through a credit card.

The paper questions the exclusion of innovative financial products, such as structured products or derivatives. It suggests the principle of "substance over form" might be applied to consider whether the products could be considered as generating interest payments.

It suggests reconsidering whether interest-generating securities "wrapped" within life insurance, pension or annuity contracts should be exempt from the directive. Mr Kovacs's officials are due to hold two further meetings with industry experts before making a decision on the directive.