Commission supports investment tax rate of 20&percent;

Date: 21/05/1998

By Tim Jones

THE European Commission is set to propose a minimum tax rate of 20&percent; on interest paid to savers who invest their cash outside their own member state.

The 20 Commissioners were expected to approve a draft directive today (20 May) reviving a nine-year-old proposal to harmonise the way member states tax interest paid to non-residents.

Taxation Commissioner Mario Monti says his aim is to ensure a “more balanced” tax burden between capital and labour in the Union, and redress a major distortion to investment within the single market.

The directive would give member states the choice of setting a minimum 20&percent; rate of tax to be withheld from the interest 'coupon' paid to non-residents, or force domestic banks to provide details of interest paid to a saver's home tax authority - an approach described by Monti as the “coexistence model”.

These rules would apply to all 'debt instruments', bonds as well as cash deposits in banks, as long as they were owned ultimately by an EU individual (rather than a corporation) who was not ordinarily resident in the state where the money was deposited or the coupon paid.

Individuals would be covered even if they invested through a 'fiduciary' account held in trust by somebody else or benefited from holding a bond which paid no interest, but which eventually paid them a lump sum worth many times the original price.

The proposal has been welcomed by the German and Belgian governments, resentful at the loss of huge amounts of tax revenue to bank accounts, bonds and unit trusts held by their citizens in Luxembourg.

Luxembourg was opposed to a previous proposal which called for a 15&percent; tax rate and an end to bank secrecy, and would have applied to residents as well as non-residents.

It has not yet responded to the new initiative, although it agreed to the general framework in a finance ministers' statement last December.

Luxembourg Premier Jean-Claude Juncker is concerned that applying a standard withholding tax on interest in the EU will lead to a huge outflow of funds to Switzerland and into tax havens.

Monti is determined to address the issue within the Organisation for Economic Cooperation and Development (OECD) and in negotiations with the Swiss.