Commission raises savings tax pressure on micro states

By David Ferguson

Date: 11/03/04

TIME is running out for the European Commission to reach a tax agreement with Andorra, Liechtenstein, Monaco and San Marino, following a meeting of EU finance ministers this week.

The Commission's current work plan pencils-in March 2004 for agreement with the micro states. The four, with a combined population of just 170,000, have dragged their feet on implementation of "equivalent" measures contained in the June 2003 savings tax directive.

"The problem is that nobody wants to be first. Perhaps that means provisional agreements," said Jonathan Todd, spokesman for Internal Market Commissioner Frits Bolkestein.

Resistance by the tax havens to Commission proposals makes ever more unlikely a Council of Ministers decision before 30 June allowing the savings tax directive to enter into force on 1 January 2005.

Three weeks ago, Ecofin ministers ruled out further negotiation concessions. But failing agreement with the four micro states and Switzerland, which now links approval to satisfactory results in other bilateral negotiations, EU members may halt the directive's implementation. Already Austria's Finance Minister Karl-Heinz Grasser has threatened a veto, failing agreement. Luxembourg, too, is concerned that its financial centres will lose out to micro states and EU dependencies, such as the Cayman Islands, if they ignore the EU's tax fraud legislation.

"We're in a competitive world. Europe will lose out to other countries in the Caribbean or Singapore due to the savings directive," said Prince Nikolaus of Liechtenstein, head of the country's mission to the EU in Brussels.

He feels Europe's micro states, too, will be disadvantaged compared to non-European financial centres.

Additionally, the directive has been criticized by experts, as it is applicable only to individuals, allowing evasion possibilities via companies and trusts.

The Commission has also been accused of heavy-handed tactics in negotiating with the micro states.

"What do you expect? Liechtenstein, for example, didn't even want to negotiate at the beginning," responded one EU official.

"A relationship cannot be based upon threats. You need the right balance and the EU has certainly used its weight in negotiations," replied Prince Nikolaus.

"We would have appreciated a better discussion climate, especially at the beginning of the negotiations."

The prince feels there is more understanding now.

"Compromise formulae could bridge divergences, minor questions on drafting and some open issues such as clarification of definitions, particularly with respect to paying agents and exchange of information on request.

"We hope to find an agreement in the next few weeks," he added.

Any deal should be similar to last May's draft agreement with Switzerland on withholding tax on EU citizens' savings income at source, as did states such as Luxembourg, Belgium and Austria, to retain banking secrecy.

"The Principality of Monaco has for a long time now agreed with withholding income at source," said an official at Monaco's finance department.

"But it is difficult to talk of deadlines concerning all countries, associated and dependent territories affected by the directive."

With the March date moving closer, Bolkestein's spokesman Jonathan Todd hopes there's some time left.

"The ultimate deadline is, of course, June. Then the Council of Ministers should decide whether or not the 'equivalent' measures are sufficient." he said.

Meanwhile, there was some good news for supporters of the savings tax regime this week.

Britain and the Netherlands told European finance ministers that their dependent territories, at least, had agreed to sign-up to the system.

Dutch Finance Minister Gerrit Zalm said The Hague has reached "model agreements with Aruba and the Antilles".

And the UK's Gordon Brown said a similar deal with its dependencies, the Channel Islands, the Isle of Man and the Cayman Islands.

This week Bolkestein revealed that the hardest nut to crack in the micro state negotiations will be San Marino.

"Without the support of member states, in particular from Italy, there will be no possibility of signing an agreement with San Marino," he told reporters.

• David Ferguson is a European business journalist at Euro-correspondent.com

The European Commission has yet to reach agreement with the tax havens of Andorra, Liechtenstein, Monaco and San Marino on implementation of 'equivalent' measures contained in the June 2003 Savings Tax Directive. The problem makes it less likely that the Directive will enter into force on 1 January 2005.