Mixed reaction to UK bid for savings tax exemption

Date: 23/09/1999

By Tim Jones

THE European Commission is conducting an urgent investigation into whether controversial British proposals aimed at breaking the deadlock over the planned EU-wide savings tax are workable.

The move is seen by diplomats as a sign that British proposals to give high-value 'eurobonds' a tax break are being taken seriously as the mid-December deadline for a deal approaches, despite the frosty reception they were given by finance ministers earlier this month.

Commission officials are examining whether foreign-currency debt traded via international clearing houses can be exempted from the tax as suggested by UK Finance Minister Gordon Brown. The Commission's findings are due to be outlined in a report to national fiscal experts next Thursday (30 September).

"Member states want to clarify exactly how the eurobond market works so we can judge whether the wholesale market can be excluded from the scope of the directive and the Commission's study is intended to help this," said one.

At a meeting of treasury officials in Brussels this week, several member states were sceptical that all bonds traded through clearing houses could be exempted from the new tax, but agreed to look at the Commission's study.

However, the British push to set a threshold for taxing individually-held bonds of €40,000 apiece met with less success, since most member states and the Commission felt this was too low and should head up towards €100,000.

The draft legislation unveiled 17 months ago would oblige governments to establish a 20% tax rate for interest paid to an EU citizen by an institution in another member state or force banks to tell non-residents' tax offices about interest they have received. The levy is intended to hit individual tax evaders rather than institutional investors, who Brown claims account for 90% of all investment in traded debt.

In a long-awaited paper presented to his colleagues at their meeting in Turku, Brown called for tax exemptions for any bond in existence when the law takes force, as well as for all future bond issues held in a clearing system or those held outside with a minimum subscription value of €40,000.

Clearing houses - such as Euroclear in Brussels or the Luxembourg-based Centrale de Livraison de Valeurs Mobilières (CEDEL) - are clubs formed by banks and securities houses to settle mutual indebtedness between organisations and provide accounting and dividend collection services for their members.

Finnish Finance Minister Sauli Niinistö is pushing for a deal at the EU's Helsinki summit in December, although other obstacles lie in the way as well as the British problem. Sweden, the Netherlands and Denmark are fighting for a 'fairer' share-out of the spoils of the tax, fearing Luxembourg will accrue windfall benefits, and the Grand Duchy is seeking an exemption for mutual investment funds.