Bonn offers tax break on bonds

Date: 01/04/1999

By Tim Jones

EU GOVERNMENTS are considering exempting high-value eurobonds from their planned Union-wide tax on savings.

The proposed compromise would be a remarkable policy turnaround and represent a huge concession to the City of London and the UK government. Ever since the European Commission drew up a plan for savings taxes a year ago, the British have been warning that without an exemption, London's €3-trillion market for foreign-currency debt (eurobonds) would be driven 'offshore' to New York and Zurich.

In a paper prepared for national tax negotiators, the German presidency acknowledges the City's worries for the first time.

" Market operators fear partial relocation of bond-issuing business, of securities trading and paying agents to markets outside the EU if international bond issues are included. This would jeopardise the competitiveness of the Union's financial markets," it states.

When the issue was discussed by national tax officials last week, no one raised any strong objections and they agreed to pass the proposal on to EU finance ministers for debate at an informal meeting on 16-17 April.

As it stands, the proposed legislation would impose a 20% tax on interest paid - including on 'coupons' from eurobonds - to individual EU nationals by an institution in another member state. If a country did not want to levy this tax, it would have to force banks to tell non-residents' internal revenue services about the interest they had received.

The City claims that only 5% of outstanding eurobonds are held by individuals, yet all paying agents - banks which specialise in paying interest or holding bonds on behalf of clients - would be burdened with heavy administrative costs.

For months, the Commission and many governments have been reluctant to consider an exemption to deal with this problem, but the paper which has been prepared by the post-Oskar Lafontaine German finance ministry comes close.

" One solution to the problems might be not to exclude interest on international bond issues from the directive altogether, but only to exclude it where earned by those engaged in wholesale securities trading," it states.

Sources say that negotiations between the Commission, the British treasury and City representatives are seeking to define the 'wholesale' market by setting a €40,000 threshold above which individual bondholders would be exempt from tax.

This figure has not been plucked out of the air. A ten-year-old EU law regulating securities sales states that, when stock or bonds are issued in minimum units of more than €40,000, they can no longer be defined as a 'public offering'.

" Anybody who has got €40,000 to invest in one bond is already big enough and sophisticated enough to put their money in a tax haven or incorporate themselves and avoid the tax anyway," said a banking industry source. "The authorities will not lose any money in exempting them and it will allow the eurobond markets to continue."

Once the legislation was implemented, the companies, banks and governments which issue eurobonds would be certain to carve up their debt into slices bigger than €40,000 to allow their investors to avoid tax.

However, the tax would still be levied on the smaller-fry EU-resident retail investors who buy their bonds and collect their interest coupons predominantly in Switzerland and Luxembourg; often with the express aim of avoiding tax.

EU governments have set themselves a December deadline for striking a savings tax deal.

German EU Presidency has issued a paper suggesting exempting high-value eurobonds from the planned EU-wide tax on savings.