Tax provides textbook case for lobbyists

Date: 02/12/1999

By Tim Jones

WHEN the history of EU lobbying in the Nineties comes to be written, students of the art of influence-peddling will focus on two landmark campaigns in the taxation policy arena.

The first was the relentless but ultimately unsuccessful attempt to overturn the 1992 decision to abolish duty-free shopping within the Union. The second is the ongoing fight by the City of London and the Luxembourg banking fraternity to fend off the most serious bid yet to introduce a common system for taxing income from capital right across the EU.

The latter, which looks likely to kill off the plan hatched by the European Commission in May 1997 to harmonise savings taxes at next weekend's summit of Union leaders in Helsinki, was influenced by both the success and the failure of the duty-free crusade.

"The first lesson we learned was that we had to get access to the top layers of government on a consistent basis, provide them with data and analysis they could not get anywhere else and scare the living daylights out of them about job losses," explains a top lobbyist for the City banks. "But, above all, the duty-free debacle showed that you had to act quickly. Once you allowed the tax to be agreed by unanimity, it would be impossible to change it."

At the heart of the dispute which soured the atmosphere at a meeting of EU finance ministers earlier this week is a Commission proposal to allow Union governments to choose between withholding a 20% tax from interest paid to non-resident EU nationals on their deposits or bonds, or forcing their banks to inform non-residents' home-state tax authorities about interest they receive.

From the moment it started talking about a new tax on savings in December 1997, the Commission's strategy was undermined by a tactical failure - its decision to allow the only assessments of the impact of the tax on banks and the potential revenues to come from the banks themselves and 'offshore' financial centres.

They focused on the impact on the market in tradeable debt and, in particular, that issued by companies and governments in currency other than their own - instruments known as 'eurobonds'. This European market, estimated to be worth about €3 trillion in outstanding bonds, is based almost entirely in London, with only minor trade and issuance business carried out in Luxembourg and Switzerland.

The association representing bond issuers IPMA, the organisation for bond traders ISMA and an umbrella group, the London Investment Banking Federation, produced report after report on the detrimental impact of the tax on the EU's biggest financial market.

IPMA claimed that, under the Commission's draft proposal, two sectors would be hit immediately.

The first would be the retail paying agency business. Retail paying agents - banks appointed by bond issuers to hand over interest 'coupons' to individual investors - would see 1,400 jobs lost as business moved to Switzerland, according to IPMA.

It was, however, less clear what impact the tax would have on the business of devising and launching bond issues for companies, 75% of which is to be found in the City of London. According to City-based analysts Lombard Street Research, 11,000 jobs could be exported to New York if only 10% of this business were lost.

Since the UK was certain to opt for information exchange rather than the tax, the City associations were assuming that all this business would go elsewhere because of the added administrative costs of managing the complex system.

Faced with these apocalyptic warnings, British Finance Minister Gordon Brown put down a marker from December 1997 that he wanted an exemption from the tax or information-exchange system for eurobonds. The tax, he implied, should only be levied on cross-border bank deposits.

For months, the lobbying campaign focused on influencing treasury thinking and attempting to change the Commission's views. "It honestly was a shock to most of us how ignorant of the realities of the market they were," says one bankers' representative. "It was incredibly depressing to find that people were operating on prejudices and, even in some cases, class-warfare Socialist reflexes."

Commission officials nevertheless held a series of secret talks with the City lobbyists and a set of cost-cutting measures were agreed in principle.

Paying agents would be able to avoid all the administration involved in the tax if non-EU nationals produced sufficient evidence that their place of residence for tax purposes was outside the Union. Identification procedures would be reduced to little more than those already required under EU laws designed to combat money laundering.

However, Brown still needed to show a willingness to negotiate. Between April and September this year, the City associations worked hand-in-hand with the treasury to produce a strategy for exempting eurobonds from the tax.

Since most eurobonds are held by institutions rather than individuals, Brown argued that bonds traded through international clearing houses - clubs which ensure the settlement of short-term trading debts - and those with a minimum subscription price of €40,000 should fall outside the scope of the tax.

Together, this would exclude virtually all eurobonds from the levy. But even this was too much for some of the City bankers to stomach. They argued that a €40,000 minimum subscription for a 'wholesale' bond would distort the market since issuers would find it disadvantageous to launch bond offerings with round numbers. Instead, they would have to be multiples of 40,000.

"The other problem with that was that we could not see governments changing the way they issued their debt," explains IPMA chief Cliff Dammers. "They would continue to make small denominations, so the result would have been that banks would have had to set up these administrative systems in any case."

If government bonds were exempted and a €40,000 threshold set, paying agents and custodians could then put pressure on issuers not to launch anything in sub-€40,000 bundles and so avoid setting up administrative systems at all. "What you would end up hitting would be people who were too stupid or too small to move their accounts to Zurich," said one London banker.

Luxembourg kept its head down for most of the debate, content to ride on the UK's coat-tails even though it is home to the world's fourth-largest investment fund market; a position built on low capital duties at the time the fund is founded and no other taxes on dividends, interest income or capital gains.

"This is the fastest growing sector of the market," said a Luxembourg banker. "If we introduce a tax, it will head off to Switzerland, Bermuda, Gibraltar and Cyprus at the touch of a button."

So far, the Grand Duchy has not had to deploy any of its potential roadblocks: demands that the tax be introduced in tandem with Switzerland or the Channel Islands, or holding out for a 10% flat rate tax.

The most effective piece of EU lobbying in years appears to have won the day, with Union leaders expected to send the Commission back to the drawing board when they meet in Helsinki next Friday (10 December).

For the banks, there will not even be any payback. The backlash, when it comes, will be against the British government and not the City.

Major feature. When the history of EU lobbying in the Nineties comes to be written, students of the art of influence-peddling will focus on two landmark campaigns in the taxation policy arena.