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June 4, 2003 EUROPE: EU agrees savings tax deal to start in 2005 By Francesco Guerrera in Luxembourg The UK government yesterday won its long-runing battle with other European Union countries to stave off the threat of having to impose a tax that could have harmed the City of London. European Union finance ministers agreed rules that will force most EU governments to exchange information on the savings of non-residents in order to tax them in the country of residence. The rules are seen as a crucial weapon in the EU's fight against fraud, money-laundering and tax evasion. However, only three countries, Luxembourg, Austria and Belgium, will levy a withholding tax on non-resident savings. Gordon Brown, Chancellor of the Exchequer had strongly opposed extending the withholding tax to the UK. A British official said yesterday: "It is good to have a solution based on exchange of information rather than a withholding tax. We feel that the path that has been chosen will safeguard the interests of the City of London." Mr Brown had argued that a withholding tax would have jeopardised London's position as Europe's main financial centre and hurt the London-based bond market. After four hours of talks in Luxembourg, EU finance ministers persuaded Italy to lift its opposition to the rules by solving an unrelated dispute over milk production and broke a deadlock which dated back to 1989. Millions of Europeans take advantage of the freedom of movement of capital within the EU to move savings to low-tax countries, causing large revenue losses for their governments. In Germany alone, some €300bn (£215bn, $353bn) is estimated to have left the country for tax havens. Three-quarters of the proceeds from the tax that will be levied by Luxembourg, Austria and Belgium, set at 15 per cent in 2005 and rising to 35 per cent in 2010, will go to the EU country where the saver is resident, with the rest remaining with the three governments. In order to avoid capital flights from the EU, Switzerland - a favourite destination for European savings - has also agreed to levy a tax, although it strongly resisted any attempts to open up its secretive banking system. Monaco, Liechtenstein, Andorra and the UK Channel Islands, will also have to either exchange information or impose a withholding tax. The US has pledged to exchange information when requested by EU countries. The 10 countries due to join the EU next year are likely to be given until 2007 to begin exchanging information with their new partners. The new rules have been criticised by the Organisation for Economic Co-operation and Development, which believes they could hamper its efforts to get all the world's big economies to give up banking secrecy. EU finance ministers yesterday dismissed those fears and hailed the deal as triumph. "It is a crucial legislative breakthrough, as it settles an issue on which negotiations have lasted for 14 long years," said Nikos Christodoulakis, finance minister of Greece, the current EU president. The savings tax deal was agreed after a last-minute bout of horse- trading in which the EU agreed to give some 24,000 Italian farmers up to 14 years to repay without interest a total fine of €1.3bn they received for exceeding EU milk quotas in the 1990s. The concession sparked outrage from Denmark and Ireland - two countries with large farm sectors - which complained that Italian farmers were being rewarded for breaching European rules.
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