London devises new plan to exempt eurobonds from tax

Date: 29/04/1999

By Tim Jones

EUROBONDS traded via international 'clearing houses' would be exempted from EU-wide savings taxes under a new scheme devised by the British government to protect London's €3-trillion market in foreign-currency debt.

The plan, which is due to be unveiled at a meeting of national fiscal experts next Wednesday (5 May), is intended to ensure that a German proposal to allow holders of high-value bonds to escape the 20% tax is watertight, so preventing a migration of the eurobond market to New York and Zurich.

Governments have already made it clear that they are willing to consider a partial tax break for eurobonds and are putting the onus on the UK to come up with a workable solution.

British Finance Minister Gordon Brown's proposal would ensure that no tax would be withheld from interest 'coupons' paid to owners of bonds held in a clearing system such as Euroclear in Brussels or the Luxembourg-based Centrale de Livraison de Valeurs Mobilières (CEDEL).

These clubs, formed by banks and securities houses, settle mutual indebtedness between organisations as well as providing accounting and dividend collection services for their members. "Only large institutions will hold their securities through a clearing system," said an industry source. "That will take care of the vast majority of bonds."

Acting Internal Market Commissioner Mario Monti's draft legislation is intended to hit individual tax evaders rather than institutional investors. The proposed law would establish a 20% tax rate for interest paid to an individual EU citizen by an institution in another member state, or a government could oblige its banks to tell non-residents' internal revenue service about interest they have received.

Brown's plan would ensure that any institutionally held bonds not traded through clearing houses were also exempt from the tax by setting a cash threshold for minimum bond holdings above which individual investors would be excluded from its scope.

The British want to set this threshold as low as possible and are attracted by the €40,000 level mooted by City of London organisations, since this is already established in a 1989 law as the maximum for a 'public offering'. However, several member states are pressing for something closer to €100,000, which would hit smaller EU-resident retail investors who collect their bond coupons in Luxembourg.

Ever since finance ministers agreed in principle to introduce a new tax on interest in December 1997, Brown has campaigned in public for an outright exemption for eurobonds - citing City claims that the tax could cost up to 110,000 London jobs.

However, he signalled a willingness to compromise after the German presidency came up with a proposal last month to exempt the wholesale bond market while still taxing retail business. The recent informal gathering of EU finance ministers in Dresden approved the idea in principle, but asked Brown to suggest how this could be done in time for a meeting on 25 May.

German Finance Minister Hans Eichel hopes to crack the eurobond issue at that meeting, so removing a key impediment to an agreement on the Monti proposal in time for the December EU summit in Helsinki. However, other obstacles lie in the way of a deal. Sweden, the Netherlands and Denmark are sceptical that the basis of the plan - that banks specialising in paying interest to savers ('paying agents') should withhold tax from investors or send details to their home-state tax office - can work efficiently and fairly.

They believe debtors or bond issuers should withhold the tax themselves and want a system established which would repatriate tax revenue from Luxembourg to their treasuries.