Tax haven plan gets a cold reception

Date: 12/12/1996

By Elizabeth Wise

PERHAPS it is the cold weather which is prompting day-dreams of paradise islands, but tax havens are on many EU officials' minds at the moment.

European leaders are due to discuss the subject during their summit in Dublin this weekend (13-14 December), and two European Commission directorates-general are actively studying whether Spanish legislation to create a new tax haven in the Canary Islands complies with Union law.

Spain has told the Commission that it wants to establish a 'special zone' on the Canary Islands with a favourable tax regime, applicable until the year 2024. The island group, it maintains, is a “poor” region which needs help to promote its social and economic development.

But the Commission has told Madrid that some provisions in its legislation need altering to comply with EU guidelines on taxation, the single market and even state aids, because giving special tax favours would amount to subsidising the region.

Competition and Internal Market Commissioners Karel van Miert and Mario Monti are reluctant to allow another favourable tax scheme to be created in a Union member country. “The Commission and member states are working to determine what is fair fiscal competition, and this type of measure runs contrary to that effort,” said Monti.

EU finance ministers have warned that unfair or harmful competition could threaten national government revenues and endanger the single market.

Led by France and Germany, most finance ministers have agreed to fight “unfair fiscal competition” and the erosion of their tax bases by defining common standards for tax policies and enshrining them in a 'code of good conduct'. But Ireland, Luxembourg and the Netherlands - all of which have beneficial tax schemes - are less enthusiastic about the idea.

The move to clamp down on tax havens has been given impetus by the Organisation for Economic Cooperation and Development (OECD) and the G7, which both concluded this year that effective taxation in Europe is being endangered as investments are moved between EU member states or - worse still - outside the Union, for tax purposes.

Three other EU regions have recently been allowed to create low-tax zones (Ireland's Dublin Docks financial centre, Portugal's Madeira and Santa Maria free zones, and Italy's Trieste), but all under strict conditions.

Commission officials say Spain's demands that the Canary Islands' special tax status should be valid for 30 years will certainly be refused and suggest Madrid would be lucky to win approval for a five-year deal. Spain might also be asked to reduce the benefits it wants to give to new businesses being established on the islands.