January 23, 2003

Opinion & Outlook

Still Secret

The numbered account lives. On Tuesday, the EU lost a staring contest with the still-plucky Swiss, abandoning its demands for universal and automatic "information sharing" among all EU members and Switzerland, the U.S., Andorra, Leichtenstein, San Marino and Monaco.

In its place, however, the EU has proposed a withholding tax, which the Swiss have agreed in principle to implement, provided they are allowed to keep their cherished financial privacy intact. The tax would be levied at 15% starting next year, and would rise to 35% in 2010. EU members Belgium, Luxembourg and Austria would adhere to the same regime, while the other 12 member states -- and the 10 due to join next year -- would share information with depositors' home countries and would not be obliged to impose a tax.

It's not very often that these columns offer even a muted welcome to the imposition of a tax. And an automatic 35% withholding tax is harsh -- especially as savings-income taxes in some EU countries are already lower than that -- but on balance it is less intrusive than blanket information exchange, which would destroy financial privacy in Europe.

We would prefer to see the EU meet its tax evasion problem the old-fashioned way, by making its tax system more competitive with that of the Swiss and other European "tax havens." But we comfort ourselves with the knowledge that given the EU's ambitions when it started this crusade, things could have been much worse.

There remains one interesting wrinkle, however. The deal is still dependent on the agreement of those six non-EU countries. The Swiss seemed inclined to comply, and the other four European statelets are expected to go along with whatever the Swiss agree to. But it's still not clear exactly what the United States will do. The U.S. Internal Revenue Service has been itching to comply with the EU's demands, over the objections of dozens of members of Congress and high-level White House staff. The White House has not yet committed publicly to pulling the plug on the IRS rules, but the EU may yet find that even its compromise proposal will not see the light of day.

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