Ball in London’s court over savings tax plan

Date: 18/06/1998

By Tim Jones

TAXATION Commissioner Mario Monti is calling on the City of London to devise workable alterations to his controversial savings tax proposal if it wants to protect its 2-trillion-ecu Eurobond market.

A first round of negotiations between member states' tax experts on the proposal will take place on 8 July, when British officials are expected to restate Finance Minister Gordon Brown's warning that he will block the plan unless Eurobonds are exempted.

“The City is valuable for the whole Union,” said a Monti aide. “We need a level playing-field and we can't have competitive distortions. But if someone can find a way to limit further the impact of the proposal without doing this, we would welcome it.”

If the proposal were agreed by all 15 member states, financial institutions would either have to withhold 20&percent; from the interest 'coupon' paid to non-residents or hand over details of interest paid to that saver's home internal revenue authority.

The proposal not only covers bank deposits, but also fixed-income securities (bonds) as long as they are in the name of a non-resident individual. Crucially for the City of London, debt instruments denominated in a currency foreign to that of the issuer (Eurobonds) would fall within its scope. Two thirds of all Eurobonds are issued in the City, which in turn accounts for 75&percent; of all subsequent trading in the debt.

Groupings of Eurobond traders and the British Bankers' Association have argued vociferously against the plan, claiming that 20&percent; of these instruments are held by individuals and that the imposition of a new tax or bureaucratic information-sharing would lead to a huge outflow of capital from the Union into Switzerland and offshore financial centres.

Monti believes the figures for individual ownership of Eurobonds are exaggerated, but even the lowest estimates of 8&percent; would still account for more than 140 billion ecu of traded debt.

The Commissioner is increasingly confident that he can persuade both the British government and City institutions to accept the withholding tax proposal, albeit adapted, in return for a push on liberalising Europe's financial services market.

“There is an increasingly perceptible link between progress in financial services and progress in taxation,” said Monti in a recent speech in London. “Many member states are not really prepared to go much further in the single market for financial services unless broadly parallel progress can be negotiated in the field of tax coordination.”

He issued a warning to the UK industry, saying: “If this process of tax coordination were to lose momentum, many member states would, I suspect, react by being much less forthcoming in making the necessary progress on financial services.”

Officials claim this was the reason for Monti saying at last month's meeting of EU finance ministers that he wanted to remove obstacles to investments by private pension fund managers, a long-standing demand of the UK pensions industry.