EU tax compromise agreed

Gordon Brown and Tony Blair discuss summit issues

EU leaders meeting in Portugal have secured a last-gasp agreement on the controversial issue of taxing cross-border savings, which has been in deadlock for two years.

The lone dissenter, Austria, eventually yielded to intense pressure and accepted a system under which EU countries will gradually change banking secrecy laws to crack down on tax evasion.

For the UK this was an extraordinary result

UK Prime Minister Tony Blair

In earlier talks in Santa Maria da Feira, all the other 14 member nations had accepted the compromise proposals.

But Austria had refused to back down, determined to protect its long-standing secrecy laws.

Before the deal was settled, the German Finance Minister Hans Eichel had commented in frustration: "Austria is incapable of any sort of community spirit."

Agreement

A withholding tax of 20% to 25% will be levied by Austria, Luxembourg, Belgium, Greece and Portugal, in a dual arrangement in conjunction with exchange of information.

Austrian Finance Minister and Chancellor at EU summit

The other 10 member nations will concentrate on exchanges of information to tackle cross-border tax evasion.

There will be a two-year negotiating period with countries outside the EU - such as the US, Switzerland and Liechtenstein - aimed at winning reassurances that they will take similar measures on an open exchange of information.

Luxembourg has argued that the reassurances must guarantee that the same measures as the EU's will be introduced, namely that non-residents' savings income will be reported.

Under the agreement, it will take about nine years for the new system to be adopted in full.

Argument

A "withholding tax" is simply a tax that is deducted at source, as with income tax.

The debate is over whether tax charged on the interest paid on savings should be treated in this way across the EU.

Austria is incapable of any sort of community spirit

German Finance Minister, Hans Eichel

Countries such as Germany originally promoted the idea of a withholding tax because residents are routinely moving their savings across the border to avoid paying German tax rates.

The German authorities cannot then trace these movements of funds because Luxembourg has strict banking secrecy laws.

The UK has been against the tax because City financiers said it would hit London hard - particularly the lucrative Eurobond market.

But all countries have been united in the aim of cracking down on tax evasion.

Secrecy

For this reason, UK Chancellor Gordon Brown called for an end to banking secrecy throughout the EU rather than the deduction of tax at source.

It was a tremendous result not only for Britain, but also the European financial markets

Bank of England governor Eddie George

Luxembourg was originally opposed to this because its banks earn huge amounts of income from the foreign funds they attract by virtue of the country's secrecy laws.

But Gordon Brown argued that an end to secrecy and open exchange of information about accounts held by non-residents would mean tax could be levied properly without having to impose a deduction at source.

He has been calling for global agreements so that the crack-down on evasion can be extended to other financial centres such as New York and Geneva.

Reaction

UK Prime Minister Tony Blair told a news conference: "For the UK this was an extraordinary result. We have agreed on principles exactly as we have set out.

"Europe has agreed to proceed on the basis of fair tax competition and an exchange of information and not tax harmonisation and a withholding tax."

He said the summit outcome, including progress on a non-binding Charter of Human Rights, marked the end of an era of "Britain versus the rest".

Governor of the Bank of England Eddie George said: "It was a tremendous result not only for Britain, but also the European financial markets."