Van Miert gets tough with offshore banking centres

Date: 05/11/1998

By Tim Jones

COMPETITION Commissioner Karel van Miert is serving notice on EU member states that he plans to take an increasingly hardline approach to the establishment of low-tax offshore banking centres.

His proposed new rulebook on tax subsidies states clearly that such schemes will only be allowed if they "contribute to regional development and relate to local activities", address genuine local problems and do not cause "significant tax revenue losses" in other countries.

In the draft guidelines, which are due to be approved by the full Commission next Wednesday (11 November), Van Miert's Directorate-General for competition (DGIV) claims that offshore activities do not "normally provide satisfactory support" for the local economy.

As EU countries compete for footloose capital, the number of offshore centres has burgeoned to take on Luxembourg and the City of London. These include low-tax zones in Trieste, Madeira and Santa Maria, and Gibraltar. Enormous amounts of money are at stake - the Channel Islands alone are believed to house more than 400 billion ecu.

Attempts by the Spanish government to set up a Zona Especial Canaria (ZEC) in the Canary Islands have run into stiff opposition from DGIV, largely because it would offer sweetheart tax deals to foreign companies.

"Certain exceptions to the tax rules are ... difficult to justify by the logic of a tax system," state the draft guidelines. "This is, for example, the case if offshore companies are treated more favourably than onshore ones or if tax benefits are granted to head offices or to firms providing certain services within a group."

The new rules are designed to close every possible loophole which governments might exploit to protect their domestic companies through discriminatory tax treatment or attract neighbouring countries' firms with predatory fiscal practices.

They complement the decision taken by finance ministers a year ago to combat "unfair" tax competition in the field of business levies through agreement on a new code of conduct. The new rulebook states that all forms of exceptional tax treatment - special deductions or accelerated depreciation of assets, credits, exemptions or deferment of tax debt - can be prohibited under the Treaty of Rome's rules against the granting of illegal state aid.

Tax subsidies would be banned if they relieved the company concerned of an expense it would otherwise have been forced to make, if they affected competition and trade between member states, and if they favoured "certain undertakings or the production of certain goods".

'General' measures, which apply throughout the economy and do not give preference to certain sectors or regions, will still be allowed under EU rules.

When the draft guidelines were discussed by national competition experts last month, they were keen to know whether the Commission would allow such "general measures" if they applied only in a region of a member state which had tax-raising powers. "This is a specific concern of the Spanish," said one expert.

In Spain, the Basque country's three provinces and the Navarre regional authority all have the power to set business tax rates; a situation which has sparked disputes with the central government in Madrid. The latest spat concerns the siting of a 30-million-ecu Daewoo Electric plant in Vitoria in the Basque country.

The Commission's draft guidelines suggest that "only measures whose scope extends to the entire territory of the state" can get around the strict prohibition against "favouring certain undertakings".

Instead, regional aid schemes will have to be submitted to the Commission for prior approval based on the guidelines. If a scheme is found to be unlawful, Van Miert will instruct the government concerned to claw back the value of the illegal tax break plus interest.