Lisbon faces hard slog over tax policies

Date: 13/01/2000

By Tim Jones

FEW jobs in the EU's 15-sided chess game are tougher than inheriting abject failure in a major policy initiative and turning it into a success.

Yet this is precisely the challenge facing the incoming Portuguese presidency as it seeks to revive plans to coordinate EU taxes on interest income, corporate profits and energy consumption.

Clinching a deal on this most jealously guarded of all national prerogatives would never have been easy. But it has taken on Herculean proportions given that the previous Austrian, German and Finnish presidencies appear to have explored every conceivable avenue of compromise and failed.

The Portuguese themselves wonder aloud whether there is any more juice which can possibly be squeezed from this lemon. After all, the most contentious part of the formal package - a planned 20% tax on savings income - was diluted out of recognition in the dying days of 1999.

Nevertheless, Finance Minister Joaquim Pina Moura is bound by a string of summit declarations to try and EU fiscal policy diplomats have identified potential - albeit minimal - room for manoeuvre for the man who will guide tax policy until July.

"If there is any chance of pushing the package forward, it could only be on the basis of the December joint letter," said one diplomat, referring to a last-minute initiative from the European Commission and the Finnish presidency days before last month's Union summit in Helsinki.

The letter dubbed itself a "radical simplification of the existing draft" on coordination of taxes on individual savings.

The Commission's original plan would allow member states to choose between setting a minimum 20% tax rate to be withheld from interest paid to savers who invest their cash outside their own country or require banks to inform savers' home-state tax office of the interest they have paid to them.

The British and the Luxembourghers opposed this plan from day one. However, it was UK Finance Minister Gordon Brown who was seen to scupper the deal by holding out for a total tax exemption for interest 'coupons' paid on tradable debt denominated in a currency other than that of the issuer ('eurobonds').

The last-ditch compromise devised by Internal Market Commissioner Frits Bolkestein and Finnish Finance Minister Sauli Niinistä in early December sought to win Brown over by reducing the extra administrative burdens of the tax to virtually zero.

"I am sure the Portuguese will try to run with this," said a diplomat close to the talks. "Let's face it: the Brits only had a few days to look at this and, as we have seen more than a few times during these negotiations, they need longer than that to study the ideas, talk between their ministries and with the City and come back."

The Bolkestein/Niinistä plan left open the possibility of watering down information-gathering requirements for 'paying agent' banks in the UK or in the international bond market.

Pina Moura is said to be considering commissioning officials to draft a detailed text which would allow agents to forego requirements to formally identify a bond's ultimate owner and tax residence according to specified rules, although such an exemption would probably be time-limited.

The Portuguese emphasise, however, that the UK is not alone in opposing the plan as it stands. Like Niinistä, Pina Moura is likely to convene separate meetings of ministers' representatives in an attempt to overcome Danish, Dutch and Swedish objections to the way the potential tax revenues would be shared out.

Lisbon has not decided how to deal with the 'code of conduct' on corporate tax breaks. A report to the Helsinki summit from a standing committee of officials and junior ministers identified close to 60 national and regional exemptions which 'unfairly' lured investment away from neighbouring countries.

"Identifying the schemes was the easy bit and that took nearly two years," said an official on committee. "We do not know what member states want us to do now: roll back the schemes? Promise never to introduce schemes like them again?"

Diplomats are convinced that Lisbon will hold back from seeking a decision on 'roll-back' or 'standstill' since the success of the code of conduct depends so much on progress with the savings tax proposal.

The Dutch and Belgian governments, which were both heavily criticised in the code of conduct report, will not even consider falling on their swords unless London and Luxembourg are willing to compromise on the taxation of interest income.

With the corporate tax plan on the back-burner, Pina Moura may well turn his attention to the long-neglected issue of energy taxation. Although this is not formally part of the tax package, the Austrian government tacked it on to the other proposals in a bid to maximise the number of trade-offs available to its presidency in late 1998.

"There is some scope for trying that again, especially with the British," said one diplomat involved in the negotiations over the past three years. "The British have a special interest in this issue and could help get some trade-offs on the withholding tax."

The most recent version of the Commission's proposed harmonised energy tax, published three years ago, would introduce new minimum excise duties on coal, electricity and gas and uprate existing minimum duties on mineral oils - €287 per thousand litres of petrol and €245 for diesel - to €500 and €393 respectively by January 2002.

This has been effectively blocked by the Spanish government, which believes that such a move would discriminate against southern EU member states with their low gasoline taxes, heavy coal-burning and under-developed gas markets.

Pina Moura is under pressure from some northern governments, including the UK, to put the introduction of duties for coal, electricity and gas to one side, and ask Bolkestein to reassess existing Union-wide minimum rates and propose their uprating. The highest petrol duties apply in the UK, France, Germany, the Netherlands, Belgium and Italy.

In a mirror image of the savings tax plan, the Portuguese minister is likely to proceed on the basis of the compromise most likely to win over the proposal's deadliest opponent. In the case of the energy tax, this is a paper drafted by the German presidency this time last year which foresaw long-term tax exemptions for coal-burning and nascent gas markets.

In both cases, the dangers are clear. "This is the big, big problem for the presidency," said a former Commission tax official. "We have all concentrated on bending over backwards for the British and the Spanish but, if too much is given away, the Germans and the French will find it hard to take."

Pina Moura may well conclude, as many diplomats already have, that his efforts would be better expended elsewhere.

Major feature.