London fears negative effects of bid to stop evasion

Date: 18/02/1999

By Chris Johnstone

Europe's financial capital, the City of London, fears the planned EU-wide tax on savings will drive away much of the business it pioneered outside the Union and hike up the costs of what remains by at least 20&percent;.

Estimates of possible jobs losses in the City of London range from 10,000 to 110,000, amid indications that other financial centres are already gearing up to poach the business.

The City's first criticism of the proposal is that the tax aimed at clamping down on evasion could be easily dodged by sophisticated individual investors.

The plan calls for the institution which actually delivers interest payments to the investor to deduct the withholding tax. However, investors could still continue to collect their interest gross if they diverted final payments through non-Union countries.

A study by Merill Lynch estimates that London has cornered between 10&percent; and 12&percent; of the €5-trillion market for managing the wealth of the world's high rollers. Around 35&percent; is overseen from non-EU Switzerland which, according to many observers, stands to gain most from the proposal.

“Many of the companies involved are not intrinsically British, such as Chase Manhattan, and could easily relocate to other financial centres,” said Paul Tipping of the British Bankers' Association.

City of London companies firmly reject the European Commission's claim that the costs of adapting to the new regime and coping with the administrative burden would be “relatively limited”.

Tipping points out, for example, that a British investor in French bonds could ask for the UK's Inland Revenue to levy the withholding tax. However, for that to be accepted, the French authorities would have to provide certificates to accompany every interest payment. “Many aspects of the directive have just not been thoroughly thought through,” he insisted.

Financial institutions would have to prepare themselves for foreign bond holders coming off the street, redeeming their coupons and paying the appropriate levels of interest. “This might not be a big issue in itself, but systems still have to be prepared,” said Tipping.

However, there are dissenters from this doom-and-gloom scenario. Some insiders argue that many of the problems which are now threatening the City's booming eurobond business could be easily solved if the Commission simply promises to respect existing bond contracts until they expire and only apply the tax to newly created ones.