Traditions weigh heavy on gold tax plan

Date: 23/05/1996

By Tim Jones

FINDING the indirect taxation cupboard bare, the Italian and Irish presidencies are reviving a plan to establish a common European system for taxing the commercial use of gold.

However, the four-year-old proposal from the Commission to harmonise member states' disparate regimes for levying value added tax (VAT) on gold looks set to become as bogged down as other suggestions for new forms of taxation, such as those proposed for energy use and savings income.

“The problem is an old one,” said one EU government's indirect tax negotiator.

“Member states have their different ways of taxing gold and they all think their way is the best.”

Those differences will be reflected at a meeting of member states' tax specialists in Brussels today (23 May).

Europeans' diverse attitudes to gold reflect long histories and traditions, relating to individual countries' experiences of inflation or political upheaval. For many people, gold has been seen as a constant store of wealth in an uncertain world while, for others, investing in bullion or jewellery would come a distant second to sinking savings into mutual funds or insurance policies.

The way gold is held also depends on tradition, whether it is in the form of certificates, futures contracts, deposited in registered bullion accounts or simply hidden under the bed.

The Commission's proposal, dating from 1992, aims to bring gold transactions within the scope of the 1977 sixth VAT directive.

All sides agree that some form of harmonisation could be an advantage, as demonstrated by a recent high-profile court case in the UK involving an organised gang arrested and charged with buying gold in Belgium at 1&percent; VAT and smuggling it back into the UK for conversion into jewellery - an activity that would normally attract 17.5&percent; VAT.

The Commission wants to establish different tax regimes for 'financial' and 'industrial' gold.

Financial gold is held in central banks, as a certificate of ownership or on an account (so long as the trading is carried out by registered professionals and the operation does not result in the physical delivery of the metal).

Under the proposals, this 'non-physical' gold would benefit from a zero rate of VAT to avoid double taxation and prevent any undermining of the free flow of the official gold market.

But gold sold via a financial institution to an individual would be subject to the normal VAT rate, since it would end with the physical delivery of the gold. Industrial gold, which is used in electronics, motors or metal alloys, or for manufacturing jewellery, would also be subject to normal VAT rates.

Supporters of a dual system argue that applying a zero rate to non-physical gold would also avert a potential threat to the EU's predominant gold market from Switzerland, where investors are favoured with a zero rate on gold.

Emerging markets in Central and Eastern Europe, where there is a long tradition of hoarding gold to guard against an uncertain future, could also pose a threat to the EU market if tax obstacles were strewn in its path.

“Having such a regime would avoid the flight of capital to other countries but also - and this is important - keep gold trading within legal circulation,” said an EU official. “We want to avoid the encouragement of illegal trading.”

However, some representatives of the bullion markets have expressed fears that the proposed distinction between financial and investment gold would be hard to define and could disrupt the market.

Even though the proposal had made little headway in the four years since it was submitted, the Italian presidency raised the issue in January when it found there was little to negotiate in the area of VAT reform.

“The Italians raised it because there was nothing else on the table for VAT,” said a diplomat. “We were told they were only doing this because there was nothing to do, but when it came up in the working group, the presidency seemed to be pushing hard for an agreement.”

“It has not made a great deal of progress,” said another. “We'll see what the Irish do with it.”