Swiss bankers have reacted furiously to Gordon Brown's demand that they disclose the identity of foreign nationals sheltering cash in their accounts. In an attempt to appease the EU the Swiss government has agreed to charge investors a 35% withholding tax. The 35% rate is well below the savings tax rates of France, Germany and Italy. Another thorny issue is embedded in the chancellor's wrangle with Switzerland. He hates the precedent of an imposed withholding tax because he fears it could be embraced throughout the EU - and this would cripple the City of London's huge eurobond market, since its success is built on the principle that eurobond interest is paid tax-free. Indeed, one of his greatest EU coups was to block EU plans for a withholding tax in 1999. (Sunday Telegraph Business 10/11/02)
The EU failed again to persuade Switzerland to end its banking secrecy and agree to the automatic exchange of information. However, at its finance ministers meeting on Tuesday, it considered a tax amnesty aimed at encouraging people to close Swiss bank accounts, the Financial Times reported. The hope is that even proposing such an amnesty could break down Switzerland's opposition to an exchange of information on savings as part of an EU drive against tax evasion and fraud. (EUobserver.com 6/11/02)
Switzerland could face possible financial sanctions from the European Union if it fails to lift its banking secrecy laws and co-operate with Brussels over a new savings tax. EU finance ministers agreed at the last meeting to explore penalties against the Swiss, who are not willing to hand over information on EU citizens suspected of tax evasion. (EUobserver.com 9/9/02)
Talks between Switzerland and the EU on the taxation of savings income have stalled. The talks which have been going on for over a year are part of the bilateral II rounds. Switzerland is reluctant to commit itself because these agreements affect their bank secrecy laws. The Commission was frustrated at the lack of progress as other third countries will now also not commit themselves. (EUobserver.com 8/5/02)
A hard-fought EU deal to tax the savings of non-resident foreigners has collapsed just six months after it was agreed. The collapse means the issue will now have to be discussed at the Laeken summit on 13 December, just days before the launch of the euro as a cash currency. At a meeting of European finance ministers on Tuesday, Austria, Belgium and Luxembourg objected to plans for an end to banking secrecy. They are now insisting that they will only agree to the plan if the EU also forces other tax havens in Europe - like Monaco, Liechtenstein, and Switzerland - to also amend their bank secrecy laws. The problem for the Commission is that Switzerland in particular is unlikely to amend its banking secrecy laws to allow access to the records of EU residents. The problem arises from a proposal to harmonize tax rates on savings throughout the EU, in order to prevent tax evasion. Under a deal agreed in July, EU states would exchange information about cross-border savings accounts held by non-resident EU citizens. The three countries which have strenuously objected to divulging banking information - Austria, Belgium and Luxembourg - would be granted a seven-year transition period under the proposal, during which they could impose a 15% withholding tax instead. The deal, which was originally agreed at the Feira summit in Portugal in 2000, was brokered by the UK Chancellor Gordon Brown. The UK originally feared that the EU proposal would mean a withholding tax was applied to all savings accounts, including the vast institutional holdings of bonds in London, making it uncompetitive as a financial centre. Mr Brown is separately negotiating with UK dependent territories like the Channel Islands to ensure they do not become tax havens for EU residents. (BBC Online 05 Dec 2001)
United States Treasury Secretary, Paul O’Neill and the British Chancellor of the Exchequer, Gordon Brown, have signed an agreement that will scrap the withholding tax on profits made by British firms trading in the United States and on the dividends earned by British pension funds there. This is harmonizing taxation the way it should go downwards, and will be welcomed by British firms and pension funds. However, if the European Union succeeds in its aim of introducing a withholding tax in all the member states, particularly the United Kingdom businesses will start thinking of ways to transfer more of their financial operations to the United States. (EUobserver.com 26/7/01)
Controversial proposals for the European Union to be funded by a new tax levied on people's savings are to be put forward later this year despite strong opposition from Britain. Michaela Schreyer, the European Commissioner responsible for the EU's budget, endorsed a plan yesterday being drawn up by Belgium, which takes over the EU's rotating presidency in July. (Independent 16 March 2001)
OECD wants more money to investigate offshore tax havens and 'harmful tax practices'. One OECD source said that it was being asked to provide a 'fig-leaf' for EU countries who failed to agree on a withholding Tax on bonds earlier this year. (D Telegraph 30/10/00)
Although negotiations over a directive which will impose a single European tax level on savings have run into considerable opposition from Britain and Luxembourg, the German Finance Minister, Hans Eichel, has said that he expects agreement to be reached on the matter by the time of the Nice summit. It seems that the debate is now turning on the level at which such a tax will be fixed. Germany wants it to be between 20% and 25%, while Luxembourg is prepared only to accept 15%. [Handelsblatt, 17th October 2000] The British government has in the past said it was opposed to European harmonisation of tax levels as a matter of principle but it looks like this principle is now being abandoned. (European Foundation Briefing 20/10/00)
At the EU Feira Summit, the Government has won agreement from all EU nations except Austria for its alternative to the Withholding Tax, but has failed to stem the push towards tax harmonisation. Under the new plan, the EU has two years to agree an exchange of information on overseas savings accounts in all international financial centres. Only if that is agreed - and Switzerland has already signalled its dissent - will the EU enter a seven year transitional period in which countries can either levy the Tax or exchange information on savers. After that, all EU countries will exchange information. (BfS briefing 22/6/00)
The government's failure to veto European Union plans for a withholding tax on savings is hitting the City's international bond market. Swiss bankers have been reporting unprecedented capital inflows since the spring of last year. (FT 27/11/99)
BRITAIN'S European partners are threatening to humiliate Tony Blair by sidestepping a British veto on a new Europe-wide witholding tax which is seen as a threat to the City of London. Mr Blair and Gordon Brown, the Chancellor, vowed to block proposals for a savings tax on cross-border investments but officials in Brussels have produced a scheme to move the legislation into an area where the national veto does not apply. If successful, the ploy could set a precedent for developing a harmonised European Union tax system by majority voting, overriding British objections and leaving Downing Street's European policy in tatters. The Telegraph has learned that European Commission lawyers have been ordered to prepare the ground for presenting the so-called "withholding tax" as a single market measure, should Mr Blair use his veto at this week's EU summit in Helsinki. Although any member state can veto a tax proposal, single market legislation requires only a majority of member states to vote in favour, enabling British objections to be dodged. Britain fears that the new tax could destroy London's flourishing eurobond market, which relies on tax breaks for foreign investors. A senior Commission aide told The Telegraph: "The Commission intends to take this right to the wire and fight beyond Helsinki if needs be. We have lawyers investigating whether the absence of a savings tax in places like Luxembourg and London adds up to unfair competition in the single market. If it does, then changes can be made by a majority vote and the veto doesn't count. If British objections then continue, it could go all the way to the European Court of Justice." Treasury officials reacted furiously to the revelations that Brussels has plotted behind Britain's back. A spokesman said yesterday: "We know nothing about this. But there is no way we will stand for this kind of outrageous double-dealing". ( Sunday Telegraph 11/12/99). The tactic of circumventing Britain's veto with the Single Market ploy has been denied by the Commission (Eurofaq Posting 8/12/99)
Labour Euro-MPs have voted for "a comprehensive political agreement on reinforced tax policy co-operation" in the European Parliament, i.e. for the introduction of the witholding tax. The vote today (Thurs - 2/12) was on the European Parliament's Resolution on the European Council at Helsinki. The full text of the amendment (No. 14) referred to in this press release reads: "...urges Ecofin to redouble its efforts before the European Council to reach a comprehensive political agreement on reinforced tax policy co-operation, as a significant contribution to the strengthening of economic and monetary union, the fight against the erosion of the tax base and the development of employment-friendly taxation". The amendment was rejected by 247 votes to 215 with 11 abstentions. (CCO Press Release 2 December 1999)
The EU competition commissar, Mario Monti, has said that the Commission will produce its own proposals to fight against "unfair tax competition" in the EU if the summit at Helsinki fails to produce agreement on the matter. Britain and Luxembourg have made it clear that they will not give ground on what Monti regards as "tax exceptions", i.e. on their sovereignty. The Finnish presidency remains determined to force Britain and Luxembourg to give in on the withholding tax, while the German government, supported by a majority of other EU states, are similarly resolved to press ahead with "a minimum level of tax coordination" [Handelsblatt, 29th November 1999]
Dominique Strauss Kahn, France's finance minister, said it is too early to talk of minimum tax packages. Instead, he warned the EU would have to consider introducing qualified majority voting for tax decisions if blockages such as that over the withholding tax continue. (FT 9/10/99)
The president of the Swiss Bankers Association, Mr Krayer, believes the EU's proposed withholding tax is dangerous and risky. He said it would result in an unacceptable amount of capital flight to other financial centres such as the US, Canada, Japan and Singapore. The EU wants the banks responsible for paying interest on bonds to report to the investor's tax authority on what interest is paid. The Swiss would not co-operate Mr Krayer, "I make no secret of the fact that such a reporting obligation is simply out of the question for us". He denied Switzerland would become the Eurobond market because Switzerland already has a withholding tax. They could, however, be made exempt from the Swiss withholding tax. (Daily Telegraph 21 April 1999)
"There is a matter implicit in the push for a Tax Harmonisation Directive, the withholding tax on savings, which has not yet been discussed. The administration of the deduction information, no matter which method is used by any of the 15 EU member states, requires the establishment of a central tax office with compliance capability in Brussels at the EC level. Once established, this office will expand into an EU direct tax service and will soon merge with VAT and customs administration to create a unified EU fiscal office. All the little changes in tax administration - both direct and indirect - over the last 4 years or so in the UK are explicable when one sees them in this new context (as I have said several times in the past). And once a unified EU tax system is in place, the UK will never regain its independence except by rebellion."(Eurofaq posting CJKArkell 16/5/99)
The British government softened its threat to veto the proposed Europe-wide savings withholding tax, signalling it would press instead for an exemption for the Eurobond market. (FT 10/12/98)
In 1987 when the German government imposed a 10% withholding tax on domestic interest income it led to massive sales of German government bonds by foreign investors. It was forced into an embarrassing U-turn within four months. (FT 3/11/98)
A City delegation met MEPs to explain how damaging the savings tax would be to the London market. It could destroy 11,000 jobs. After the meeting the 40 MEPs in the Economic and Monetary Affairs Committee issued a draft report which proposed to double the scope of the tax to cover businesses also. Jacques Santer Commission President reminded the government that it had agreed to the harmonisation of business taxes by signing the Code of Conduct. (D telegraph 26/11/98)
If Britain continues to oppose EU taxation of Eurobonds it will be much harder to avoid pressures for wider European tax harmonisation measures, according to Commissioner Mario Monti. He said that Britain's willingness to collaborate on savings taxes is a test of the UK's suitability for membership of the euro. (FT 28/11/98)
The EU intends to impose a uniform minimum savings tax of 20% on all savings. The UK government opposes this withholding tax. London is by far the largest centre for trading in Eurobonds. The City organisations point out that this proposal would drive financial services business out of the EU on a large scale. The huge Eurobond and Eurodollar markets were first created in the sixties in Europe, principally in London, when the USA imposed a similar 15% tax. It has repealed this law. (European Voice 5/6/98). The proposal is designed to stop tax evasion. The fact that Eurobonds are bearer bonds with no ownership registration and fiercely guarded banking secrecy laws still exist means the new laws can be circumvented. (FT 22/5/98). The Japanese government is likely to abolish the 20% withholding tax on securities from 1999. The government wants to make yen assets more attractive to foreign investors. The introduction of the tax thwarted the development of a local corporate bond market. It is expected that a wave of new investors would bring in over a billion pounds. Most other industrialised countries such as the US and UK abolished withholding taxes in the 1980’s. (FT 26/5/98). It will be necessary to increase the return offered to compensate for the withholding tax just at a time when the European bond markets should be expanding to offer corporates a cheaper and readier source of funds. (FT 8/6/98 letters). Scandinavian countries will push for a higher rate of tax because it is an important source of revenue. They charge 40% tax on savings. (FT 2/6/98).
The German and Belgian authorities have long campaigned for a common savings tax rate for non-residents, but have encountered opposition from the UK and Luxembourg. The UK traditionally opposes measures to harmonise tax policy and anything that might weaken the City of London's position as a magnet for investors. Luxembourg's zero rate on savings income, combined with tight banking secrecy, underpin the wealth of the Grand Duchy. But a watered-down version of the proposal has brought the UK and Luxembourg back to the negotiating table. Monti has agreed that the scope of the directive should be limited to non-residents, that governments could choose whether to levy a tax or simply provide information on interest income to a saver's home authority, and that nothing will be done to undermine the EU's international competitiveness. Monti has promised to take account of the international dimension of the savings tax issue. Not only do Luxembourg and the Channel Islands provide a haven for savers in high-tax countries but also, in a world of free capital movement, many other states are equally attractive. (European Voice 3/3/98). It is ironic that, at the time it is trumpeting the arrival of the Euro as a challenge to the dollar, Europe is about to give back to the US its position as the capital market centre of the world. (FT 22/5/98). It is reported that UK government ministers will not oppose the withholding tax for fear of losing political capital if they stand up too aggressively for British interests. (S Telegraph 11/11/98). The Swiss have made moves to attract business in issuing and trading eurobonds (European Voice 24/9/98).