The disparity between low income and corporation tax in the UK and much higher levels in other member states is central to the arguments used by UK critics against tax harmonisation.

They say it will be the UK which loses out if the government signs up.

Tax discord

According to some, the tax rates between the EU countries have never been more disparate.

Taxes eat up 38% of UK national income while the EU average is more than 45%.

Corporation tax in the UK stands at 31%, rising to 35% in Spain, while in Belgium it is 41% and 45% in France and Germany.

Income tax in the UK ranges from a bottom rate of 20p to a standard rate of 23p and a top rate of 40p.

In Belgium it goes from 26% to 55% and in Germany from 26% to 53%.

Tax harmonisation could mean a hike in UK fares

Items such as food, children's clothes, books and newspapers, public transport, and water supplies, while most other EU member states levy VAT on them.

Last week, Germany's new finance minister Oskar Lafontaine insisted that EU countries who signed up for the euro should also accept a coordinated tax policy.

Germany's finance minister wants closer cooperation

Mr Lafontaine, a left-winger, said that Germany would ensure that tax harmonisation was agreed upon during its six-month EU presidency which starts in January.

UK Chancellor Gordon Brown immediately dismissed any idea that the UK would be reliquishing its sovereignity in tax.

Witholding tax

Advocates of tax harmonisation have particularly targeted withholding tax, a levy on income from savings and investment, and have discussed setting a 20% rate for non-residents' interest income.

But the UK has ruled out any moves towards introducing a withholding tax, as it says it would jeopardise the lucrative eurobond market based in London's financial district.

Instead, Mr Brown wants to look at ways to increase disclosure in order to curb tax avoidance.

Earlier this month, junior Treasury minister Dawn Primarolo said the government would back any moves to improve transparency to help clamp down on tax avoidance.

But other EU finance ministers have said disclosure is not enough. They appear determined to press for a minimum rate of tax on interest income.

Exemption for eurobonds?

A compromise deal combining increased disclosure, a new minimum tax rate on interest income with an exemption for eurobonds is the outcome predicted by EU sources.

Despite Mr Brown's hostility to tax harmonisation, he has still agreed to sign up to a new policy paper that calls for greater co-ordination of tax policy after the launch of the euro on 1 January.