UK sinks hopes of early tax deal

Date: 05/11/1998

By Tim Jones

AUSTRIAN Finance Minister Rudolf Edlinger has given up hope of brokering a deal to harmonise EU taxes on savings, energy use and corporate profits by the end of the year.

Diplomats say that the reluctance of the British government to make a firm commitment on the taxation of fuel consumption or interest income has been largely responsible for scuppering Edlinger's plans to secure an agreement during his government's presidency of the Union.

This will come as a blow to Austrian Chancellor Viktor Klima as he lays the groundwork for a general election, which could be held as early as next spring. Winning agreement on a shift in the tax burden from labour to capital is a key element of the Social Democrats' election platform. “We are looking beyond December now,” said one diplomat. “An agreement under the German presidency looks a lot more likely.”

In September, Edlinger tried to find a compromise between the disparate opinions of his fellow finance ministers by laying the ground for a set of potential trade-offs between governments. To buy off the British, Vienna proposed introducing a tax framework for companies' energy use but exempting households.

UK Finance Minister Gordon Brown cannot accept even the principle of taxing domestic fuel use since it would be political dynamite back home. However, nor would he accept the possibility of taxing companies until after the publication this week of a report into the issue by British Airways chairman Colin Marshall. “This would only leave five weeks until Vienna,” said a diplomat, referring to the summit of EU heads of state and government in the Austrian capital on 11-12 December.

Officials say progress on the energy tax proposal has been slow but sure since Taxation Commissioner Mario Monti came up with a pre-summer compromise. This would set a framework for taxing energy products and set minimum rates of excise duty on electricity, natural gas and coal with long transitional periods for certain users and zero rating for others.

Commission officials believe that a significant majority is coming around to the idea of zero rating, although clearer signs of whether their optimism is justified are likely to emerge from a meeting of national experts next Monday (9 November) in Brussels.

Edlinger had hoped that this, together with the householders' exemption, would persuade the British to tone down their opposition to the latest proposal to harmonise savings taxes; a key German and French demand.

Under this proposal, governments could either withhold 20&percent; tax on interest paid to non-resident investors or oblige banks to inform a savers' home-state authorities about interest paid to them.

Brown has been heavily lobbied by players in the 3-trillion-ecu market in foreign-currency-denominated debt (eurobonds). They claim the tax would trigger a round of contractual sales of bonds at kick-down prices and drive the market out of London to Switzerland or the US.

Last week, UK Prime Minister Tony Blair told the British parliament that the government would “certainly use our veto to stop any measure that will harm the City of London” - a statement greeted with dismay in Vienna and Brussels.