Luxembourg softens stance on savings tax

Date: 25/05/2000

By Peter Chapman

EU DIPLOMATS see no prospect of a deal on the savings-tax package at next week's high-level meeting of national tax experts, but there are growing signs that Luxembourg's opposition to a compromise is weakening.

Despite the lack of progress in recent weeks, officials say that a breakthrough could be made at a 5 June meeting of Union finance ministers or at the summit of EU leaders two weeks later, although most do not expect a final deal until later this year.

The key issue remains whether the UK can convince the rest of the Union to swallow its proposed formula for ending the impasse. Under the British plan, member states could chose to levy the tax provided they agreed that its imposition would only be temporary. In the long run, the withholding tax would be replaced by an exchange of information between national authorities, feeding information about non-resident savers back to their home authorities.

Opposition to this approach has been led by Luxembourg, which fears that an end to banking secrecy would undermine its hugely-profitable financial services sector. But there are increasing signs that the Grand Duchy could be the first to crack.

Jean-Nicolas Schaus, director-general of the Luxembourg financial markets authority, said earlier this month that the country's financial sector would be able to survive the shock of losing customers if national banking secrecy rules were scrapped. "The disappearance of banking secrecy would certainly be tricky. But our dependence on it is diminishing," he said. "If we continue on the path we have already been travelling along for some time, the financial centre would be able to survive a disappearance of banking secrecy."

Luxembourg Prime Minister Jean-Claude Juncker also admitted there were risks involved in preserving the previously sacrosanct banking secrecy rules. In a statement to the national parliament, he said the banking community had to show itself to be "irreproachable in the fight against criminality" and admitted that critics of the legislation would have a point if it was shown to be "at the service" of fraudsters.

Diplomats say that at a meeting of junior finance ministers last week, a majority of member states supported the UK's view that exchanging information was the best way to ensure that all EU citizens paid tax on their incomes.

But the UK was unable to win strong backing for a proposed sunset clause which would set a final date for abolishing any withholding taxes on savings and moving completely to an information-sharing system. Most member states favoured a looser clause which would oblige countries to assess their experience with the 'coexistence model' - under which some member states would exchange information while others levied a withholding tax - at some point in the future.

There was also disagreement over how far the Union should go towards reaching agreements with other financial centres such as Switzerland and the US before implementing any final proposals. In addition, ministers were split over the rate of any future withholding tax, although most favoured a levy of between 20% - the minimum suggested by the European Commission - and 25%.

EU diplomats see no prospect of a deal on the savings-tax package at the forthcoming high-level meeting of national tax experts, but there are growing signs that Luxembourg's opposition to a compromise is weakening.