Monti seeks to calm fears on savings tax

Date: 24/09/1998

By Tim Jones

INTERNAL Market Commissioner Mario Monti has responded to criticism of his plans to tax savings by calling for global talks to stop EU capital haemorrhaging to third countries.

He rejects suggestions that the Union should wait for all 29 members of the Organisation for Economic Cooperation and Development (OECD) to sign up to a common savings tax regime before agreeing its own system.

In a letter outlining his programme for this weekend's informal meeting of EU finance ministers, Monti acknowledges that his plan “cannot disregard the links with third countries”.

Monti's controversial proposal would establish a minimum 20&percent; rate of tax to be withheld from the interest income of non-residents in the EU, but would allow governments to choose whether to levy this or instead tell investors' home-state tax authorities about the interest they received.

Critics of the plan argue that, since the tax would be levied even on non-resident investors in the multi-trillon-ecu market in traded debt, it would merely drive businesses 'offshore' into Switzerland and the US. Recent Swiss moves to attract business in issuing and trading eurobonds (tradable debt issued in a currency other than that of the issuer) have added to the fears of EU bankers and brokers.

In a 19-page response to the savings tax proposal published earlier this week, the London Investment Banking Association (LIBA) warned that the Monti plan would damage the EU's financial services industry.

“We believe that the only way to counter these risks fully is to amend the proposal so that implementation is not required until the other OECD countries are committed to implementing equivalent measures on the same timetable as the EU,” stated the LIBA paper.

In his letter to Austrian Finance Minister Rudolf Edlinger, Monti acknowledges that his plan “involves the risk of the partial relocation of savings from Community residents outside the Union”.

However, he points out that the ministers also agreed to begin discussions with third countries “to promote the adoption of equivalent measures”.

When he chaired meetings of EU finance ministers in 1994, Germany's Theo Waigel tried hard to open talks with Switzerland and the US over this issue, but made little progress. Monti is in a stronger position now that the OECD has set up a special working group to investigate withholding taxes.

At this weekend's meeting, Edlinger will seek the support of his counterparts for an outline pan-EU deal to harmonise tax systems for corporate profits and energy-use as well as interest income.

Monti hopes the meeting will reaffirm commitments given by finance ministers in December last year when they agreed a package for dealing with “harmful tax competition”. This envisaged an Edlinger-style deal which would not be dependent on moves elsewhere in the OECD.

“The consistency of the coordination of tax policies must be made clear to external parties and this meeting is an opportunity to reinforce the positive development so far,” says Monti in his letter.

“If the informal Ecofin confirmed its political commitment to such a coherent Community approach in international tax matters, the common EU position would be significantly strengthened.”