Spanish offered radical deal in bid to agree EU energy taxes

Date: 20/05/1999

By Tim Jones

THE German government is offering sweeping exemptions for coal burning and ten-year transitions for underdeveloped gas markets in a bid to overcome Spanish opposition to EU-wide energy taxes.

Bonn's new compromise plan, prepared for a meeting of Union finance ministers next Tuesday (25 May), is the most radical attempt yet to break the seven-year deadlock over fuel levies. But it risks alienating pro-tax northern member states.

Spanish Finance Minister Rodrigo Rato argues that the European Commission's proposal to raise petrol excise duties and extend them to coal, gas and electricity use would discriminate against southern countries and stoke up domestic inflation.

The Germans, who are hoping to crack the most difficult parts of the energy tax issue in time for their Cologne summit early next month, have offered Rato an olive branch.

" Member states which have particular difficulties in implementing the new minimum levels of taxation [could] be granted appropriate transitional periods, in particular in order to avoid a threat to price stability, provided this does not lead to significant distortions of competition," states their compromise proposal.

Under the new plan, coal and lignite would be exempt from duties - a key Spanish demand given the unusually high dependence of its power generators on solid fuels. Of the 108 million tonnes of oil equivalent of total energy consumed in Spain last year, coal and lignite accounted for 18 million and mining companies continue to benefit from a range of massive government subsidies.

Added to this sweetener is a proposal that countries where natural gas' share of the domestic energy market is 12.5% or less - including Greece, Portugal and Spain - could introduce exemptions or low gas duties for a maximum of ten years "provided this does not lead to significant distortions of competition".

All other member states would have to set a "positive" minimum rate, although exemptions would be available for gas as a motor fuel for domestic heating. A "low positive rate" would be applied to electricity with tax breaks available for hydroelectric plants or household users.

Under the German proposal, the Commission's planned uprating of minimum duties on mineral oils which was meant to begin last year, would not even start until 2001.

The proposed indefinite exemptions for household fuel use are designed to win over the previously sceptical British government, which has now accepted the principle that industrial energy consumption should be taxed.

At their meeting next week, finance ministers will also consider a proposal from the UK's Gordon Brown to exempt the 'wholesale' market in foreign-currency debt (eurobonds) from a planned 20% tax on interest income paid to EU-national individuals across borders.

Another German paper drawn up for the meeting claims member states are "prepared to consider the possibility of a compromise solution that takes into account the ways the bond markets operate and the objectives of the directive".

Bonn will suggest a separate series of compromises designed to deal with complaints from the City of London that the savings tax proposal is excessively bureaucratic and costly.

Paying agents - banks which specialise in holding investments on behalf of clients - would be allowed to forego withholding taxes or reporting interest paid to non-EU residents "if the payee submits satisfactory evidence of third-country residence".