Portuguese set to attempt the impossible on tax policy

Date: 16/12/1999

By Tim Jones

IF ANTONIO de Sousa Franco wants a quiet life, he will have already ordered his officials to draft tax policy conclusions for next June's summit in Lisbon.

The Portuguese finance minister could pre-cook a couple of 'compromise' papers on how to devise EU-wide systems for taxing savings income, energy use and corporate profits, allow his Union colleagues to restate their prepared positions and hand the whole knotty problem over to the French presidency in July.

De Sousa is bound to be tempted to do just that. But as the representative of a small EU country, he is more likely to attempt the seemingly impossible: convince the Spanish that they should hike their fuel taxes, persuade the British that the City of London can cope with extra paperwork and talk Luxembourg into dismantling the banking secrecy upon which its wealth is built.

The wording of the Helsinki summit conclusions was meant to give De Sousa a firm steer on how to make progress. Although the UK - with Luxembourg hiding in its coat-tails - refused to countenance a new withholding tax applicable to foreign-currency bonds, it was agreed that everyone who lives in the EU “should pay all the tax due on their savings income”.

But before the ink was dry, the two sides in the argument were disagreeing over what this wording meant. Clearly, said French Finance Minister Christian Sautter, that applies to eurobond-holders. Not so, said the UK's Gordon Brown. British residents already pay tax on interest. The underlying problem is not disparate tax levels but banking secrecy, he said.

De Sousa's only hope is to build on the incredibly watered-down version of the savings tax proposal agreed between new Internal Market Commissioner Frits Bolkestein and the Finnish presidency just before the summit. If Brown can beconvinced that bond-interest paying agents will have no extra administrative burden on top of that already imposed by existing EU laws, he might buy a deal - particularly if he is convinced that this would force others out into the open.

So far, the Luxembourgers have been able to avoid threatening a veto because the British have been regarded as the non-communautaire wreckers. The Danes, Swedes and Dutch will also take the gloves off regarding their demand that savings revenues be repatriated from Luxembourg to the errant investor's home-state treasury.

In a move reminiscent of the demise of the EU's old carbon energy tax in December 1994, the savings tax issue has been shunted into a 'high-level' official working group. These officials will be unable to negotiate any serious issues without ministerial guidance; a phenomenon seen all too clearly when the fuel levy proposal was passed down the chain in 1995-97.

De Sousa may, however, be in a stronger position than Finland's Sauli Niinistä or Germany's Hans Eichel when it comes to talking the Spaniards back to the table over energy taxation. As a southern minister, he too has long been sceptical about a new regime which would ratchet up Iberian and Greek petrol prices and undermine nascent gas industries while leaving northern member states untouched.

He will nevertheless be duty-bound as president to try to do something with the energy tax proposal. Given Madrid's refusal even to talk about the existing plan, De Sousa will either seek to persuade Bolkestein to repeat his performance over savings taxation and completely redraft the proposal once again, or split the plan in two. This would mean that existing minimum duties on petrol and diesel could be raised while new rates on coal, gas and electricity are sidelined.

Fortunately for De Sousa, the third part of the package is largely out of his hands.

Without an agreement on the savings tax, the Dutch and Irish in particular will not be prepared to consider rolling back the most blatantly predatory corporate tax regimes in the Union.

De Sousa has in front of him a report, prepared for the Helsinki summit by a committee chaired by UK Treasury Minister Dawn Primarolo, listing 66 such regimes. This is likely to land in Sautter's in-tray in July with the spine intact.