Bonn hopeful of savings tax deal after Luxembourg polls

Date: 28/01/1999

By Tim Jones

THE German government is convinced that the last stumbling block to creating an EU-wide system for taxing savings will be removed after Luxembourg's general election in June.

With the Grand Duchy's British allies softening their long-standing opposition to the controversial plan, Bonn believes Luxembourg will cut its losses and agree to withhold tax from the thousands of foreign nationals who open bank accounts in the country.

"We obviously must take into consideration their sensitivity shortly before the elections in June, but there are signals from Luxembourg that they are ready to move forward," said Barbara Hendricks, the German state secretary for tax policy. "They reject the information exchange system but, as far as I can judge it now, they would agree to a withholding tax."

Under last year's proposal from Tax Commissioner Mario Monti, member states would be able to choose between withholding a 20% tax from interest paid to non-resident savers or bond-holders, or obliging banks to inform the saver's home-state tax authority of the amount of interest paid. Luxembourg, with its history of bank secrecy, would find the latter hard to accept.

The Grand Duchy's Prime Minister Jean-Claude Juncker has long opposed the introduction of a common savings tax, claiming it would harm the whole of the EU as capital fled to the US and Switzerland. He has also said "unfair" use of corporate tax breaks by other countries was luring away some of the Grand Duchy's 220 foreign banks.

Hendricks, who will mastermind the Union's tax policy negotiations until the German presidency ends in July, believes that the substantial progress made in eliminating corporate tax breaks in the code of conduct group chaired by UK Treasury Minister Dawn Primarolo will assuage Juncker's fears. "The Luxembourgers are very interested in limiting unfair competition in corporate taxation. That is the decisive point which can help us move forward with the capital income tax," she said.

Luxembourg Budget Minister Luc Frieden this week took a hard line against the tax plan, warning it would never be acceptable unless a similar system operated in the EU's neighbours.

For this reason, said Hendricks, German Finance Minister Oskar Lafontaine, Finland's Sauli Niinistö and Monti will begin exploratory talks before Easter with Switzerland and small tax havens including Liechtenstein, San Marino and Andorra.

The UK authorities continue to oppose Monti's plan amid fears about the impact it would have on London's €3-trillion market for foreign currency denominated bonds (eurobonds). This week, British Socialist MEP Simon Murphy failed to attract sufficient support in the European Parliament's economic and monetary affairs committee to exempt these bonds from the tax.

While proclaiming her understanding of the British position, Hendricks said "such an exemption would be very problematic for us" because it would create "shelters" from the tax.