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Bureau of National Affairs

Thursday March 8, 2001

International Taxes:
Bond Exemption, Swiss Vote Among Factors Threatening Progress on EU Savings Tax Pact

     BRUSSELS--European Union officials said the chances of actually implementing controversial legislation on the taxation of savings income are growing slimmer, despite a March 5 agreement on terms for exempting certain bonds. 

     The bleak outlook for the tax package, which has been under negotiations for more than three years, arises because of various developments during the first week of March. The most recent signal of trouble was a declaration issued by Luxembourg that it had a different interpretation of the rules for exemption or "grandfathering" the bonds.

     Another sticking point is the outcome of a March 4 referendum in Switzerland in which voters overwhelmingly rejected any move for the country to begin negotiations to become an EU member. 

     In addition, there are setbacks in agreeing on a list of "harmful" taxation laws in place in certain EU countries, including a number of regulations that give U.S. companies major tax breaks when doing business in Europe.

     Luxembourg Bond Interpretation

     Concerning the bond exemption agreement announced March 5 (44 DTR G-5, 3/6/01), its main tenet called for bonds issued after March 31 to be covered by the savings tax. Luxembourg promptly issued a declaration saying it interpreted the agreement differently.

     It stated that it believed that subsequent issues of bonds authorized before 2001 would be exempt from the taxation on savings even if they are issued in years after 2001. 

     The Luxembourg objection triggered a declaration by Belgium that Luxembourg's interpretation of the agreement was totally unacceptable and it would not accept a directive if Luxembourg was allowed to implement its interpretation of the law. It is well known in Europe that many Belgian citizens, who face the highest taxes in Europe, place their savings in tax-free bonds in banks in Luxembourg, which has bank secrecy laws. 

     A Council of Ministers and European Commission official said the Luxembourg and Belgium declarations are ominous signs for the tax on savings directive, which the EU executive body is expected to propose in detail the coming months for planned approval in 2003. 

     "The Luxembourg declaration is seen by many as laying the groundwork for a possible veto of the savings directive in the future," the official said. 

     A Luxembourg official told BNA, "We disagree with the need for the special rules on the exemptions." Asked if the declaration meant that Luxembourg would implement the rules differently, he said, "We agreed to the council regulation that needed unanimous consent before it was approved. But now we will wait to see the contents of the directive the Commission is going to propose. Remember, that directive still has to be approved before the rules agreed the other day are put in place." 

     Switzerland Vote

     The Luxembourg official changed the subject to the issue of Switzerland and whether or not it would agree to "equivalent measures" such as an information exchange system and the elimination of bank secrecy laws--a condition on which the eventual implementation of the EU tax on savings directive hinges.

     When EU heads of state in Portugal reached an agreement on the principles of the tax package in June 2000 it was stipulated that the Commission must strike an agreement with third-party countries such as Switzerland, Monaco, Andorra, Liechtenstein, the United States, and others to ensure an appropriate information exchange on savings income of nonresident citizens. 

     Luxembourg insisted on this condition and its prime minister, Jean Claude Juncker, said it addresses fears that if Luxembourg implements a tax on savings agreement that eventually calls for mandatory information exchange and the end of the nation's bank secrecy laws, people will move their accounts to countries such as Switzerland. 

     Swiss officials have stated in preliminary talks that the nation's bank secrecy laws are off limits, and Commission and Council of Ministers officials stated that after more than 70 percent of voters in the Swiss referendum rejected plans to start EU membership negotiations, the chances of an agreement are even less. 

     "It is obvious that Swiss citizens have rejected the EU and there are signs that this issue of the EU demanding Switzerland drop its bank secrecy laws played a key role in that rejection," said the Council of Ministers official. "That vote certainly muddied the water even more than it already is and it raises serious questions about the likelihood of reaching an agreement with Switzerland and other third countries by 2003." 

     Harmful Tax Measures

     The other setback for the tax package has occurred in the past month as member states try to finalize a code of conduct that would freeze or eliminate harmful tax measures in the EU member states. 

     Over the course of the last two years a special committee dealing with the issue drew up a list of 69 different tax regimes in various EU countries that were said to be harmful because they provided a competitive advantage vis-a-vis other member states. The code of conduct has always been twinned with the tax on savings directive in the tax package, and there has been an understanding that there must be agreement on both issues before the tax package takes effect. 

     Recently, however, some member states, including Belgium and the Netherlands, insisted that there was never a "final" agreement on the list of harmful tax measures. They insist that only the concept of either "standstill" or "rollback" that would be applied to the code of conduct was agreed.

     "This was a big blow because the special group worked for more than two years to pinpoint these 69 measures," said a Council of Ministers official. As a result of the blockage on approving the 69 measures in the code of conduct, the member states have agreed to address each measure individually in order to determine what changes could eliminate its harmful taxation status.

     "This could take six or seven years," said the Council of Ministers official.

     'Coordination Centers' Used by U.S. Firms

     The list of 69 measures included what are described as "coordination centers" permitted by tax laws in Belgium and the Netherlands. These coordination centers allow foreign companies, including those from the United States, to move profits from subsidiaries in other EU member states through their headquarters in Belgium or the Netherlands without paying corporation taxes. 

     Because of this law there are hundreds of U.S. companies with their European headquarters in either the Netherlands or Belgium. "Both countries stand to lose a lot if that law is changed," said a Commission official. 

     The only good news of late on the EU taxation issue concerns negotiations between the union and the United States regarding an information exchange system on the savings income of nonresidents. 

     "We have had a first session of talks and they went very well," said a Commission official. "We were very happy to hear that both sides agree on the issue."

     By Joe Kirwin

     Copyright © 2001 by The Bureau of National Affairs, Inc., Washington D.C.


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