European savings tax moves step closer

Date: 07/10/1999

By Tim Jones

A DEAL setting out a common regime for taxing Europeans' savings income may be only two months away.

Many vital interests still have to be defended and the fat lady has not been booked yet for the mid-December EU summit, but none of those involved in the negotiations are ruling out a savings tax agreement in Helsinki.

Just how monumental this would be can be judged by stepping back six months. Then, the British government - with the Luxemburgers hiding behind its coat-tails - appeared to be refusing to negotiate at all. With the UK 'holding things up', everyone else felt safe. The talks were well and truly stalled.

Withholding tax rates in the Union range from zero to 50% and most of the governments which deduct tax at source from their residents' savings exempt those of non-residents in a bid to attract foreign money. Yet, despite the onset of the single market and European Commission proposals dating back to June 1989 on the table, nobody was prepared to negotiate.

Suddenly, in the spring, the UK government took a strategic decision. The euro had been launched and German Finance Minister Oskar Lafontaine, who had repeatedly embarrassed his counterpart Gordon Brown with his calls for common tax systems, ousted.

Brown pounced. The rhetoric stayed the same - he would never accept the "imposition" of a 20% tax on savings income - but he told EU finance ministers on the quiet that he was prepared to seek an exemption for the lucrative €3-trillion market for foreign-currency 'eurobonds'.

"It is impossible to overstate the importance of this move," said one national tax policy negotiator. "The Brits put a lot of obstacles in the way of a deal, but at least they were talking and they were offering real, workable compromises."

The proof could be found in the bond markets themselves. Investors who had ignored a decade of Commission attempts to harmonise withholding taxes began to get cold feet and eurobond prices fell.

When the British budged, other governments lost their cover. The Dutch, Danes and Swedes stopped complaining from the sidelines and produced a detailed plan to redistribute the estimated €100-billion tax-take from the new law. Without a redistribution system, they argued, Luxembourg would pocket their tax-euro.

The Grand Duchy itself, which had kept its head down until then, had to start talking. The government devised a plan to free investment funds - popular tax-exempt savings tools used by Germans, Belgians, Dutch and French in Luxembourg - from the new levy.

When it assumed the EU presidency in July, Finland decided to pull out all the stops to meet the December deadline for a deal. Its officials have scheduled round after round of high-level negotiations to tackle as many of these key concerns as possible.

For all the grand-standing by ministers, their officials are negotiating on the basis of the May 1998 proposal, the recent British paper and the Dutch-led compromise - and they are even trying to make the Luxemburgers slightly less miserable.

Part of a survey 'Challenges for industry', p13-20.