Saving tax harmonisation back on the agenda

Date: 23/01/1997

By Tim Jones

INTERNAL Market Commissioner Mario Monti is planning to revive a seven-year-old initiative to harmonise the EU's disparate systems for taxing interest from savings.

Seeking to capitalise on the more receptive mood he perceives among member states following his fundamental review of the Union's fiscal systems, Monti will press hard for a withholding tax agreement between all 15 EU governments.

“The approach is under consideration at the moment, but the discussions we have had so far suggest it would be interesting to combine a withholding tax and exchange of information,” said the Commissioner.

Withholding tax rates in the Union vary from zero to 30&percent; and most of the member states which do deduct tax at source from residents' savings exempt the savings of non-residents, so attracting funds from neighbouring countries where tax rates are high.

The German and Belgian authorities claim that they have lost billions of ecu in valuable fiscal revenues because their citizens are spiriting away their savings into lower-tax member states.

Monti's approach would build on the work of Belgium's Philippe Maystadt when he chaired meetings of EU finance ministers four years ago. Maystadt came up with the idea of allowing two systems to coexist: one deducting taxes from savings at the point of payment and another forcing banks to inform tax authorities of any interest paid to savers.

Monti believes such a proposal might now have some hope of winning over governments, such as the UK and Luxembourg, to the kind of harmonised capital income taxation they have fought since it was first suggested in 1989.

He claims the greater receptiveness displayed by finance ministers to his plans is due to the groundwork done by a group of their personal representatives the so-called high-level group on taxation since last spring.

“There has been a leap in awareness that when the single currency is born, tax disparities will stand out much more visibly than today,” he said. “In concrete terms, we have set the appropriate climate for proposals on capital income taxation, on eliminating distortions to business taxation in the single market and on a tax code of conduct.”

The Dublin summit in December put the high-level group on to an institutional footing and once governments have assigned their representatives, Monti will use it as the forum for savings tax talks. The last time such a tax was properly debated was back in 1993-94, but many countries were so hostile that it got nowhere.

The UK has in the past taken a stand in principle against greater fiscal harmonisation, but also guards its self-interest given the dominance of the City of London in attracting foreign savings into portfolio investment.

The other major opponent, Luxembourg, may also soften its stance. With a zero tax rate on savings and traditional banking secrecy, the Grand Duchy has sucked in peripatetic savings, especially from Belgium and Germany.

Prime Minister Jean-Claude Juncker has made it clear that he will consider arguments in favour of harmonising taxation so long as this covers more than just savings, although he would prefer these talks to take place in the Organisation for Economic Cooperation and Development (OECD) rather than the Union.

Without OECD member Switzerland, which allows non-resident customers with 'fiduciary' bank accounts to avoid paying 35&percent; tax, an agreement on savings tax harmonisation would be pointless.