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Wednesday, December 9, 1998 Published at 15:12 GMT

Business: The Economy

UK, Germany say 'no' to tax harmonisation

Germany's Oscar Lafontaine upset UK politicians with his tax proposals

The governments of Germany and the UK have agreed that there should be no unified European tax system, countering recent proposals by the new German Finance Minister Oscar Lafontaine who argued for European tax harmonisation.

The BBC's Political Editor Robin Oakley reports
The issue will be discussed this weekend at the European Summit in Vienna, starting on 11 December.

However, the new unity was immediately overshadowed when it emerged that London issued a "joint statement" of Prime Minister Tony Blair and Chancellor Gerhard Schröder without the approval from the Bonn government.

A spokeswoman for the German Chancellor confirmed that Mr Blair and Mr Schröder "had a telephone conversation this morning and reached an understanding on European tax policy", but stressed that "it was not agreed that a joint written statement would be issued."

According to the statement issued by 10 Downing Street, the two leaders agreed to combat "unfair tax competition" in the EU while speaking out against "a unified European system of corporate taxation".

Both leaders insisted that "at no time have we considered measures to harmonise personal income tax. This is not necessary for the effective functioning of the single market and is inconsistent with the principle of subsidiarity".

They ruled out higher tax burdens, which they said would jeopardise competitiveness and jobs in the European Union.

However, one of the most contentious tax issues - a minimum savings and capital tax across the EU - is not mentioned in the document.

Several EU countries, like the UK and Luxembourg, are currently not withholding any taxes on interest earned from accounts held by people living abroad. Banks in these countries attract large amounts of money from savers fleeing these taxes.

Luxembourg, for example, is considered to be a tax haven for many rich savers in Germany, and the British financial services industry has warned that a uniform savings tax would harm its business as well.

The leader of the Conservative party, William Hague, accused the government of giving away the UK's right to set its own taxes, and being part of a drive harmonise taxation levels across Europe.

Tax trouble

Mr Lafontaine caused a storm in the British media when he spoke out in favour of tax harmonisation across Europe, and was supported in his view by French political leaders.

On Tuesday, Mr Lafontaine dropped his support for harmonisation and instead used the term "co-ordination" favoured by his counterpart Gordon Brown, the UK Chancellor of the Exchequer.

The Anglo-German statement appears to be designed to clear the air before the Vienna summit.

Tax harmonisation

Many economists say that European Economic and Monetary Union, which starts in January 1999, will require some degree of tax harmonisation.

This would prevent governments from engaging in tax competition, which could ultimately lead to a breakdown of monetary union.

Meanwhile, the international investor George Soros, in charge of the multi-billion Quantum fund, told the UK Treasury Select Committee that a degree of harmonisation on capital taxes was necessary for the smooth functioning of a single currency.

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