Make or break time for EU savings tax proposal

Date: 23/07/1998

By Tim Jones

SUPPORTERS of the move to coordinate EU taxes on savings have warned Luxembourg and the UK against delaying the plan.

The Belgian authorities have threatened to hold up progress on eliminating predatory corporate tax breaks - a key demand of the Luxembourg government - unless Union negotiators make significant parallel headway on the European Commission's savings tax proposal in the coming months.

"We will judge the corporate tax dossier on the basis of progress made in the savings tax area," said a senior Belgian official. "If it seems in two or three months that the savings tax proposal is blocked in the Council of Ministers, then that would affect the corporate tax issue."

Germany and Belgium have long backed the idea of a common tax on savings income, largely because they resent losing billions of ecu in potential public revenues to bank accounts, unit trusts and bonds held by their citizens in Luxembourg.

Unlike its neighbours, the Grand Duchy does not levy withholding tax on the savings of either residents or non-residents and, at the same time, has strict laws to protect banking secrecy.

To meet German, Belgian and French concerns, the Commission has proposed setting a minimum tax rate of 20% to be withheld from interest paid to savers who invest their cash outside their own member state, or requiring banks to inform the saver's home-state tax office of the 'coupons' they have paid.

The Luxembourg government, fearful of losing a huge competitive advantage, opposes the tax proposal. But Prime Minister Jean-Claude Juncker says that he will consider it so long as predatory corporate tax behaviour is also eliminated in the EU.

Nevertheless, the recent request from Foreign Minister Jacques Poos for an independent study into the impact of the savings tax proposal on Europe's capital markets was seen as a deliberate delaying tactic. "There is a link," said the Belgian official. "France and Germany will continue to press Luxembourg and remind it that if it wants progress on corporate tax, then we want to see the same on savings tax."

One of Luxembourg's biggest bugbears - the special 10% corporate tax rate offered to high-skill industries and financial services in Ireland - was removed yesterday (22 July) when the Commission secured agreement that Dublin would introduce a uniform 12.5% rate in 2010.

The UK government is sceptical about the savings tax proposal because it applies to the market for debt instruments issued in currencies other than that of the issuer, known as 'Eurobonds', which is based largely in London.

Calculations made by the Austrian Research Institute and announced last week showed why most Union finance ministers favour the idea of harmonising savings taxes. The new regime could net an additional 200 billion ecu in tax revenues.