Savings taxation rears its head again

Date: 22/02/1996

By Tim Jones

Having been hidden away for over a year, one of the EU's oldest financial chestnuts is about to be revived - but with virtually no chance of success.

The Italian presidency wants to breathe life back into a seven-year-old proposal for harmonising the Union's diverse systems for taxing interest from savings and hopes to rekindle the debate at the next meeting of finance ministers on 11 March. It will be the first time the issue has been discussed since the presidencies of Germany and Belgium tried to win over reluctant colleagues to the idea in 1993 and 1994.

While many countries were merely sceptical, the UK and Luxembourg were adamantly opposed. The UK jealously guards its fiscal sovereignty and the pre-eminence of the City of London as a magnet for foreign savings, while Luxembourg's zero savings tax rate and banking secrecy are the basis of the Grand Duchy's wealth.

The debate goes back to 1989, when the Commission came up with a proposal for a common system of withholding tax on interest income, largely at the instigation of the French. They felt that having a single market and free capital movement together with varied tax and bank secrecy regimes was bound to cause distortions.

Withholding tax rates in the Union vary from zero to 30&percent; and most countries which deduct tax at source from residents' savings exempt the savings of non-residents. This has created a major headache for both Belgium and Germany as Luxembourg in particular, but also Switzerland, benefit from their neighbours' rising rates of taxation on savings.

In 1993, Belgium came up with a compromise proposal to allow the co-existence of two systems: one withholding tax from savings at the point of payment and another forcing banks to inform tax authorities of any interest paid to savers.

Germany's Theo Waigel tried again in late 1994, but made little headway, acknowledging that the EU would only be able to create a common system in consultation with Switzerland and other members of the Organisation for Economic Cooperation and Development.

But tax avoidance is becoming a hot issue in Germany. Tax experts believe as much as 150 billion ecu has been salted away in tax refuges in Luxembourg, Switzerland, Austria and Liechtenstein, with the loss of 10 billion ecu in tax to the German government.

Commission officials report a shift in attitudes since 1994, as member states contemplate the possibility of similar losses of tax revenue. But the problem, as always, will be the UK and Luxembourg. As long as taxation issues require unanimity, two countries or even one small grand duchy with a strategic interest in keeping a competitive edge in the market for Europe's cash, will block the plan.