Bonn undermines Monti’s pan-EU savings tax plan

Date: 25/02/1999

By Tim Jones

THE German government is questioning the very foundations of the European Commission's controversial plan to tax savings, ten months after it was published.

In a paper prepared for a meeting of member states' tax experts today (25 February), Bonn calls on EU governments to consider alternatives to the principle that the new 20% tax on interest should be withheld by specialist 'paying agents'.

Although Bonn, which holds the presidency of the Union until July, offers no alternatives, many diplomats believe the only realistic option would be for debtors or bond issuers to withhold the tax themselves.

If a majority of governments opt to move away from the 'paying-agent principle', this could undermine the entire basis of Internal Market Commissioner Mario Monti's carefully-wrought plan for a pan-EU savings tax.

When the Commission first proposed a common 15% savings tax ten years ago, the plan failed in part because it would have imposed excessive administrative costs on bond issuers.

"We have taken every care - and this is evident if you compare our proposal with the one from 1989 - in devising a system which would avoid as far as possible being a burden on financial institutions," Monti told the European Parliament recently.

In Monti's view, forcing companies which issue debt in foreign currency ('eurobonds') to withhold tax on interest paid to their creditors could drive some of this €3-trillion market out of the City of London.

Bond issuers appoint City banks as principal paying agents, who are then responsible for paying interest on their behalf. The principal agent appoints sub-paying agents, which tend to be in the UK or Luxembourg, to pay interest directly to bondholders or their collecting agents when they present their interest 'coupons'. Agents and sub-agents would withhold the tax under the 1998 proposal.

"We think there is great merit in the 'paying-agent principle' that we have introduced in the proposal compared to the 'debtor principle', which would have been much more liable to produce relocations of eurobond activity," Monti told MEPs before they voted 386 to 106 in favour of his plan.

However, some member states disagree. The Netherlands, Sweden and Denmark, in particular, believe that the paying-agent principle reinforces the lop-sided tax revenue effects of the Monti proposal.

For example, an individual Dutch, Swedish or Danish investor could buy a bond issued by a German company, which had designated a Luxembourg-based bank as paying agent. Under the Monti plan, this Luxembourg agent would withhold the 20% tax even though neither debtor nor creditor had anything to do with the Grand Duchy.

The German government is hoping to narrow national differences over treatment of eurobonds and how to share tax revenues between countries imposing a 20% tax and those which provide information on interest paid to non-resident savers by the time its Union presidency ends.