Helsinki gives up hope of clinching deal on tax

Date: 25/11/1999

By Tim Jones

FINLAND has abandoned hope of brokering the most ambitious tax harmonisation deal in the EU's history in time for next month's Helsinki summit following the UK's rejection of a package designed to cut the costs of a new Union-wide tax on savings.

Finance Minister Sauli Niinistä has decided to scrap plans for a tough tax-policy bargaining session with his 14 EU colleagues this Sunday (28 November) and curtail discussion of the three-pronged tax package at their formal meeting the following day; provoking a furious reaction in Paris, Rome and Berlin.

Officials warn that plans to enforce the EU's two-year-old code against predatory corporate tax practices and eliminate 66 'unfair' regimes are now under threat. "Whenever we have discussed this issue, there have been a lot of member states and ministers who have stressed that they treat this package as a whole," Niinistä told European Voice. "That is how we have to proceed: everything or nothing."

The minister's decision follows a last-ditch meeting with his British counterpart Gordon Brown this week at which the latter refused to bend from his long-standing demand that the €3-trillion market for foreign-currency 'eurobonds' be exempted entirely from the new 20% withholding tax on interest income.

Brown had demanded an exemption from the levy for all eurobonds issued before the savings tax directive comes into force, all bonds traded through debt-settlement clubs ('clearing systems'), and any bondholding of more than €40,000. The UK treasury argued that only this would ensure that individual evaders were hit by the new tax as the European Commission intended, while large-scale institutional investors would be exempt.

In a paper prepared for a meeting with City representatives late last week, the Finnish presidency threw cold water on Brown's demand for an exemption for "all bonds held in a clearing system". "Since bonds - held in a clearing system - are commonly held by participants on behalf of private investors or on behalf of intermediaries acting for private investors, this approach would effectively exclude the vast majority of bonds held by private investors," it states.

Instead, the Finns suggested that a threshold could be set for the rare cases when bond issuers' 'paying agents' - banks or custodians specialising in handling payments - hand over interest directly to private investors. The threshold would then be set at a minimum subscription price of as much as €500,000 - 12.5 times higher than the level proposed by Brown.

The UK finance minister even ran into a roadblock over his demand that all outstanding bonds in existence on the day the directive came into force should be exempt from the planned rules. Many bonds include 'grossing-up' clauses, which allow the issuer to pay off the debt in full at the issue price if a tax is unexpectedly introduced during the bond's lifetime. The British warned that issuers would take advantage of the fact that the average bond price has risen over the last five years and pay off the debt to the detriment of bondholders. But most governments are only prepared to consider such 'grand-fathering' exemptions for bonds with these clauses or compensation for creditors after they are triggered.

The Finnish compromise would have reduced the costs to paying agents of administering the tax by allowing them to accept satisfactory evidence' from people who claim their place of residence for tax purposes is outside the Union. Each member state would be allowed to set its own identification procedures until common minimum standards were agreed.

Financial intermediaries receiving interest payments on behalf of the ultimate beneficiary could be exempt from the tax as long as they had a certificate issued by their home-state tax authority or a commonly recognised licence to practice to show the paying agent.

Finland has abandoned hope of brokering the most ambitious tax harmonisation deal in the EU's history in time for the Helsinki summit in December 1999 following the UK's rejection of a package designed to cut the costs of a new Union-wide tax on savings.