Ministers plan to sideline the US in savings tax negotiations

Date: 03/12/1998

By Tim Jones

EUROPEAN finance ministers have endorsed a strategy designed to isolate the US in international negotiations on savings taxes.

Diplomats say the Union plans to sideline long-established multilateral talks over taxes on interest within the Paris-based Organisation for Economic Cooperation and Development (OECD) in favour of bilateral negotiations.

"We are concerned that if we try to work on this at the OECD level, it will take too long and there are too many fundamental differences of philosophy," said a senior EU tax policy official.

Ministers agreed this week to kick off separate talks with Switzerland, Japan, the US and an array of continental tax havens in a bid to export the EU's model for limiting tax avoidance by big savers. They have set up a 'troika' of the current, past and coming Union presidents to conduct their negotiations with "third countries" over how to tax payments of interest to non-resident individuals.

From January, this threesome will be led by German Finance Minister Oskar Lafontaine, who this week sparked a storm of controversy by calling for tax decisions within the EU to be taken by a majority vote, together with Austria's Rudolf Edlinger and Finland's Sauli Niinistö.

The troika will be mandated to negotiate on the basis of the EU's 'co-existence' plan to oblige financial institutions to withhold 20% from interest paid to non-residents or provide details of interest paid to that saver's home tax authority.

Several EU governments are worried that, unless the EU's competitors adopt a similar regime, capital will haemorrhage from the Union into New York, Tokyo and Zurich. Aside from these big markets, ministers called for talks to start with Liechtenstein, Andorra, Monaco and San Marino.

They agreed that the negotiations should focus on "the need to ensure a minimum of effective taxation on savings income at the international level and the specific elements of the measures which would be considered equivalent to those envisaged by the co-existence model".

The American authorities are strongly opposed to this model and have repeatedly made this clear at meetings of the OECD's committee of fiscal affairs - the venue so far for multilateral talks on this topic.

The US tax authorities, who lost huge amounts of potential fiscal revenues in the Sixties after introducing a withholding tax for non-residents, are convinced that only the "exchange of information" between internal revenue authorities will be effective in global markets.

Agreement on the new approach is a key element in the campaign which has been waged by the Austrian presidency - and is soon to be taken up by Lafontaine - for an overall deal on savings, energy and corporate taxes in the EU.

"Everything must be factored into the discussion because all we can adopt is a total package which will not limit itself to savings taxes," said Wolfgang Ruttenstorfer, Austrian state secretary for finance. "It will have to include corporate taxes and relationships with third countries if it is to win general acceptance."