UK threat to savings tax plan

Date: 04/06/1998

By Tim Jones

UK FINANCE Minister Gordon Brown will block plans for a common EU savings tax unless investors in the 2-trillion-ecu market for Eurobonds are exempted from paying it, say officials.

His tough stance, bolstered by intense lobbying by City of London financial institutions, threatens the delicate compromise proposal drawn up by the European Commission to set a minimum 20&percent; tax rate on interest paid to savers who invest outside their own country.

Brown will deliver his warning to EU finance ministers at a meeting in Luxembourg tomorrow (5 June) after Taxation Commissioner Mario Monti formally presents his plan.

If agreed by all 15 EU member states, the proposal would offer governments two ways of dealing with tax avoidance.

Financial institutions would either withhold 20&percent; from the interest 'coupon' paid to non-residents or provide details of interest paid to that saver's home tax authority.

All debt instruments - bonds as well as bank deposits - would be covered if they were in the name of a non-resident individual.

London is by far the largest centre for trading in Eurobonds, which are debt instruments denominated in a currency foreign to that of the issuer. Both the British Bankers' Association (BBA) and the International Securities Market Association (ISMA) have complained loudly about Monti's proposal.

“The underlying aim of preventing tax fraud is quite right, but the proposal as it is would be damaging and would provoke a net migration of financial services business out of the EU,” said BBA spokesman Roger Miles.

His concerns were echoed by ISMA chief executive John Langton, who said he “genuinely believed” the proposal would drive capital out of Europe, adding: “It will be very damaging to the Eurobond market and capital markets as a whole.”

The BBA and ISMA have reminded Brown that the huge market in Eurobonds and Eurodollars was first created in the Sixties after Washington imposed a 15&percent; 'interest equalisation tax' on the interest foreigners received on deposits held in the US.

Monti believes his proposal addresses British concerns because it applies only to individual Eurobond holders and not institutional creditors. Moreover, in drafting the plan, the Commission found that it would be impossible to exempt a particular type of bond-holder.

However, the UK treasury is said to be “irritated” with the Commission's response. It points out that a key text agreed by finance ministers last December envisaged the introduction of a savings tax, but stated that this should not undermine the competitiveness of the EU's financial services industry.

The UK government is also worried that a vital competitive advantage - no withholding taxes on non-residents - enjoyed by London over other EU financial centres could be lost. The London International Financial Futures Exchange (LIFFE) is locked in mortal combat with Frankfurt's Deutsche Terminborse (DTB) over who will dominate the market for financial instruments denominated in euro.

Monti will, however, receive weighty support for his plan from French Finance Minister Dominique Strauss-Kahn, who had proposed a 25&percent; savings tax rate, and Germany's Theo Waigel, whose treasury loses billions of ecu to Luxembourg, Austria and Switzerland every year in potential tax revenues.