Fresh bid for EU tax on savings

Date: 07/05/1998

By Tim Jones

THE European Commission will propose setting a minimum tax rate of between 15% and 20% on the interest earned by Eu savers who invest their cash abroad in the hope of avoiding tax in their home state.

The plan, which will be unveiled later this month, is part of a campaign by Taxation Commissioner Mario Monti to reactivate stalled proposals to align taxation on energy, savings and pensions in the wake of last weekend's decision to create an 11-nation single currency zone.

"The euro was no help in making advancements in this area because, quite understandably, the minds of finance ministers were concentrated on that rather than taxation policies. Now their minds are freer, I hope we can proceed more quickly," Monti told European Voice this week.

The campaign will open with a plan, to be adopted by Commissioners on 20 May, to revive a nine-year-old proposal for a common system for taxing individuals' interest income.

If agreed by member states, this would be the most far-reaching fiscal harmonisation measure since the EU set minimum rates of value added tax back in 1992.

The new proposal would establish a minimum rate of tax to be withheld from the interest 'coupon' paid to non-resident savers, but would allow governments to choose whether to levy this or to provide information on interest paid to a saver's home authority. Commission officials have so far refused to reveal the precise figure, stating only that it will fall between 15% and 20%.

Moves to harmonise savings tax have been championed by the German and Belgian governments, which lose billions of ecu every year through bank accounts and bonds held by their citizens in Luxembourg, Austria and Switzerland. German tax experts believe as much as 150 billion ecu has been salted away in these financial centres, with a consequent loss of some 10 billion ecu in tax each year to the federal government.

"Of course, the proposal does not extend to shares because they fall under an entirely different tax regime. But all debt instruments are within its scope: for example, cash deposits and bonds," said Monti. "The purpose is to embrace all debt instruments held by individuals, but only those who are residents of other EU member states."

In theory, financial centres could get around this by offering savers bonds which pay no interest but which, after a number of years, pay many times the original price of the security ('zero-coupon bonds').

But the Commissioner insists this loophole will be closed. "With a zero-coupon bond, by definition, you do not have interest coming to you in the form of a coupon but we would tax the capital/price differential of these bonds over their lifetime," he said, adding that an individual would not escape tax liability by investing indirectly through a fund or a 'fiduciary' account held in trust by someone else.

"We will cover savings income received by individuals in an indirect way, for example by collective investment undertakings," he said.

Most member states do not apply withholding taxes to non-residents, although France levies anything from 15-50%, Greece 15% and Portugal 20%. Although countries could choose to keep the tax exemption for non-residents and simply exchange information with other internal revenue services, Luxembourg and Austria would almost certainly apply the minimum rate instead to preserve their bank secrecy laws.

Once the savings tax proposal has been adopted, Monti will seek to breathe life into two flagging proposals to tax energy products and avoid the double taxation of pension contributions.

He will do this by redirecting them away from formal negotiations between member states' officials and into his taxation policy group - a committee of finance ministers' representatives which meets at least twice a year to discuss key principles of fiscal policy.

"I am satisfied that the discussions of the past two years have changed the climate on tax policy," said Monti. "Ministers have been put under pressure, on the one hand, because we have shown them the negative consequences for employment from a lack of tax coordination, while on the other, we have convinced them that we are not here to achieve full harmonisation but instead tax cooperation."