The making of a classic EU fudge

Date: 29/06/2000

At the end of last week's summit in Feira, EU leaders proclaimed an "historic" deal on a joint approach to taxing cross-border savings. But the agreement they reached has all the hallmarks of a deal for a deal's sake. Tim Jones reports

Jumping generations in political leadership has obvious advantages. But fresh ideas and new approaches to problems are often overridden by naivete and collective memory loss.

So it was with last week's "historic" agreement at the Feira summit to replenish German and Belgian government revenues with a joint approach to taxing cross-border savings income.

If seasoned hands like Philippe May-stadt, Theo Waigel or even Mario Monti had been in the room, the EU's finance ministers might have mastered lesson one in the Union's tax policy history book: there is a point at which emmenthal stops being a novelty cheese and becomes air.

The accord struck in Feira's backrooms bears all the hallmarks of a deal for a deal's sake. Had the cameras slipped behind the backs of the British, Belgian, Luxembourg, Austrian, French and German ministers as they signed the agreement, they would have snapped a row of crossed fingers.

Go back to the closing days of 1991. Twelve finance ministers - up against the clock to agree a new system for levying value added tax in the impending single market - opted for a half-baked regime. For now, they said, intra-Union operations between "taxable persons" would continue to be taxed at the rate and conditions applying in the country where the goods or services would be consumed.

But this was okay because the regime would only be "transitional". It would be replaced with a "definitive regime" - in which firms would treat all intra-EU supplies and services as domestic

transactions and charge VAT at the local rate - in January 1997. It was not perfect but it was a deal and, said its proponents, the logic of the single market would demand a switch to a final regime within four years.

January 1997 came and went. More than three years since this deadline passed, the European Commission has finally given up on the idea of even publishing a proposal for the establishment of a definitive regime.

Indeed, it was this very lesson that Monti learned back in 1996 when he devised the idea of a 'package' to include taxation on savings, intra-company dividends and company profits.

The agreement struck in December 1997 between the EU's 15 finance ministers on the tax package was, on the face of it, breakthrough deal-making.

Mindful of a decade of futile attempts to get individual new tax measures on the negotiating table, Monti then repackaged three priority measures and got ministers to declare their commitment to the trio.

This was how, in Brussels 30 months ago, the British and Luxembourg ministers signed up to the original 'co-existence' model for taxing savings; meaning that countries would be allowed to choose between imposing a withholding tax of at least 15% on interest paid to non-resident EU nationals or forcing their banks to inform these savers' home-state authorities about their capital income.

As a trade-off for reluctant Luxem-bourg Premier Jean-Claude Juncker, the Irish, Belgians and Dutch agreed to put the Union's most predatory corporate tax regimes on public display with the ultimate aim of 'roll-back'.

To give them their due, the British added a rider to the agreement even then that a withholding tax system should not apply to interest paid on foreign-currency-denominated debt ('eurobonds'); that accident was always waiting to happen. But they did promise to negotiate on the basis of the tax/information-sharing model - a principle they which ultimately tore up at the Helsinki summit two years later.

Once this principle had been agreed, Monti succeeded in getting a new savings tax proposal through the European Commission bureaucracy within five months which offered a 20% rate or information sharing.

Negotiations got underway on this basis. British negotiators, who could not get Finance Minister Gordon Brown to focus on the dossier, spent months looking for an exemption for eurobonds. Meanwhile, the Dutch, Danes and Swedes dug in their heels for a 'revenue-sharing' system to stop Luxembourg bagging the lot.

Juncker, who never had any intention of agreeing to the 'co-existence' or any other model which would undermine his country's prosperity, told his budget minister to hide behind the British objections.

It was only within a fortnight of the Helsinki summit in December 1999 that treasury officials got Brown's undivided attention. He was horrified at the political potential of the dossier for the opposition Conservatives and refused to compromise despite pressure to do so from Prime Minister Tony Blair.

Brown held out and secured wording in the communique that "all citizens resident in a member state of the European Union should pay the tax due on all their savings income" as well as a commitment to set up a high-level working group to devise a new model.

Brown was late to the game but, once on the pitch, he characteristically crushed all-comers. He knew Portuguese Prime Minister Antonio Guterres, the EU's deal-maker-in-chief, would not want this issue spilling into the French presidency.

Within two months, his officials tabled an entirely new proposal. They no longer wanted a eurobond exemption since there would be no tax. Instead, tax evasion should be combated by opening bank books. Secrecy - the basis of Luxembourg's post-war prosperity and a constitutional guarantee in Austria - would be scrapped.

By winning German Finance Minister Hans Eichel over to his camp, exploiting Guterres' cunning diplomatic skills and keeping the French onside, Brown turned the debate on its head.

In Feira, ministers agreed that "exchange of information, on as wide a basis as possible, shall be the ultimate objective of the EU in line with international developments". Until then, national tax authorities must exchange information on savings income or operate a with-holding tax of between 20% and 25%.

So why did the Luxembourghers and Austrians roll over? Answer: they did not.

Juncker threw in so many 'only ifs' that the deal will be unworkable. While the final law is being put together, the French, Belgian and Swedish presidencies will be negotiating with the US, Switzerland, Liechtenstein, Monaco, Andorra and San Marino in an effort to talk them into "the adoption of equivalent measures".

But why should they, given that the Austrians have not even done it? The Feira accord stresses that while Vienna accepts the findings of a recent Organisation for Economic Cooperation and Development (OECD) report on access to bank information, it "cannot, at this stage, for constitutional reasons, accept a move to drop banking secrecy for non-residents".

It is a view shared by the Swiss, who also signed up to the OECD report but only because it did not question banking secrecy. "Financial privacy is a deeply-rooted concept among our population," Swiss Finance Minister Kaspar Villiger told a New York audience in April. "I would consider its abolition to be inconceivable in terms of Swiss policy even if we wanted to eliminate it in response to external pressure. Financial privacy is therefore not up for negotiation."

And that is just one major country. The Luxembourghers also secured a pledge from the British and Dutch to introduce an information sharing/tax system in "all relevant" dependent or associated territories. By the end of next year, commitments to the EU model will have to be secured from Jersey, Guernsey, the Isle of Man, Bermuda, the Cayman Islands, Turks and Caicos, Anguilla and Montserrat.

But the Channel Islands, which boast €240 billion in deposits alone and have no savings levy, have declared that "this position will not change should the EU adopt a common withholding tax".

If, however, "sufficient reassurances" are received from this group, Union ministers will decide unanimously by 31 December 2002 to pass the law.

The closest the majority could get to a commitment from the secrecy countries on what shape this would take was a statement that Denmark, France, Finland, Germany, Ireland, Italy, the Netherlands, Spain, Sweden and the UK "expect" the tax to be 20-25% and that the exchange of information system would be introduced within five years of the law taking force.

EU leaders flew home, French Finance Minister Laurent Fabius left knowing he would be able to concentrate on what interests him under his country's Union presidency - reform of the Euro-12 coordinating group - and all the talk was of deals, Brown's triumph and EU unity.

It was anything but.

Major feature. At the end of the summit in Feira, EU leaders proclaimed an 'historic' deal on a joint approach to taxing cross-border savings. But the agreement they reached has all the hallmarks of a deal for a deal's sake.