Banks lament cost of planned EU savings tax

Date: 24/06/1999

By Tim Jones
IT IS not often that EU legislation lives up to its hype, but the now notorious plan to introduce a common system for taxing savings income does just that.

If agreed unanimously by all 15 member states - and that is still a giant-sized 'if' - it would have a profound impact on Europe's banking and financial services industries as well as on government coffers.

Europe has long operated a system based on hypocrisy. Governments condemn tax dodging while, at the same time, fostering a list of offshore havens as long as their arms.

The rich have always known how to avoid paying tax on their capital income by putting their millions into banks in Luxembourg, Monaco, Liechtenstein, Andorra, San Marino, Jersey, Guernsey, the Isle of Man or even in the new offshore centres in the Canaries and Madeira. Virtually all the established banks on the Union's mainland are knee-deep in this business.

"You will not find anyone who will say that tax evasion is a good thing," said an executive at a leading British high street bank. "But we have all got used to this way of working. People who have savings accounts with us onshore pay tax and those offshore can if they want to. Basically, it is their responsibility and not ours."

All this could be about to change if the latest version of the European Commission's proposal for an EU-wide savings tax is agreed by the end of this year, as planned.

Under Acting Internal Market Commissioner Mario Monti's proposal, governments would set a 20% minimum tax rate on interest paid to individual EU nationals by an institution in another member state. Any government which did not want to introduce the tax could choose instead to force its banks to divulge information on interest paid to non-resident savers to their home-state tax authority.

To the German, French and Belgian governments - the biggest losers of tax euro to their Luxembourg neighbour - this sounds both fair and flexible. But the banking industry claims it would be an administrative nightmare, particularly since it would extend to holdings of bonds denominated in currency other than that of the issuer ('eurobonds').

Instead of levying tax from bond-issuers, banks specialising in paying interest to savers ('paying agents') or holding bonds for institutions ('custodians') would withhold the tax from investors or forward details of their identity and fiscal residence to their home-state.

Monti opted for this approach precisely to avoid the charge that a tax on bond issuance would drive business out of the EU. "We have taken every care, and this is evident if you compare our proposal with the previous one from 1989, to devise a system which puts as little burden as possible on financial institutions," Monti said at the end of last year.

But there is no satisfying the paying agents and custodians. "They have several preoccupations, but underlying it all is cost," said a Commission official. "What they really want is to have a situation where the extra cost of the directive is zero and that is obviously out of the question."

Banking associations in the City of London claim that only 5% of outstanding eurobonds are held by individuals, yet all paying agents would have to account for interest paid to all ultimate or 'beneficial owners' of bonds, so imposing heavy administrative costs across the board to deal with a problem in a tiny corner of the market.

Both the Commission and the German presidency have been willing to find ways of cutting administrative costs which, according to the banking lobby, would mean the loss of up to 5,000 jobs. Bonn has offered to allow paying agents to forego withholding taxes or reporting interest paid to non-EU residents "if the payee submits satisfactory evidence of third-country residence".

By the time the directive is close to agreement, costs will have been slashed and the bulk of eurobond business exempted.

The big remaining question will be whether the tax will apply to all the dependent territories, as demanded both by the Commission and by the Luxembourg government. That will be the next big fight.

Article forms part of a survey 'Financial Services'.