Talks on savings tax plan close to collapse

Date: 04/11/1999

By Tim Jones

FINNISH plans to broker the most ambitious tax-harmonisation deal in the EU's history at their showcase December summit are close to collapse, according to fiscal policy officials.

The decision by the German, French and Italian governments to issue a formal rejection of British demands to exempt tradable foreign-currency debt from a planned Union-wide savings tax appears to have dashed remaining hopes of an early agreement.

In a four-page submission, the euro-zone's big-three treasuries dismissed recent proposals from UK Finance Minister Gordon Brown to leave the City of London's €3-trillion 'eurobond' market beyond the reach of the 20% tax. They are expected to repeat their objections at a meeting of EU finance ministers next Monday (8 November).

Under the European Commission's current proposal, governments could choose to withhold a 20% tax from interest paid to non-resident EU nationals from their deposits or bonds, or force their banks to inform non-residents' home-state tax authorities about the total interest they received.

Since most eurobonds are held by institutions rather than individuals, Brown argued that bonds traded through international clearing houses - clubs which ensure the settlement of short-term trading debts - and those with a minimum subscription threshold of €40,000 should fall outside the scope of the tax. On top of this, he says, the tax should only apply to bonds issued after the new law comes into force.

But these exemptions are too much for Germany, France and Italy to swallow. "Apart from slight differences, the two proposals of the UK lead to the same result; namely, a total or almost total exemption of the bonds held by individuals so that, in practice, the scope of the directive would include only deposit accounts," states their paper.

The British have made it clear to the Finnish presidency that they cannot accept a deal at next month's EU summit in Helsinki which does not include a water-tight exemption for the institutional bond market.

The Luxembourg government has also thrown in a 'spoiler' counter-proposal of its own just four weeks before the summit and after 17 months of negotiations. When Budget Minister Luc Frieden proposed his 10% flat-rate tax on all bank deposits and returns from money market funds to EU finance ministers' personal representatives, many other delegates burst out laughing.

"This is a scheme according to which tax would be withheld at source by the bank where the deposit was held and paid to the neighbourhood tax authority; in other words, to the Luxembourg treasury," said one diplomat involved in the talks.

The second tier of the EU's tax package is making much greater progress. A group of national tax officials chaired by Dawn Primarolo, one of Brown's junior ministers, has managed to ratchet down a hit-list of the Union's most blatant predatory corporate tax regimes from 250 to 60. However, a corporate tax deal depends on an agreement on the proposed savings levy.