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The BBC's Jonathan Charles
"Other countries don't see it like that"
 real 28k

Monday, 29 November, 1999, 22:44 GMT
Anger as UK blocks EU tax
Gordon Brown Chancellor Gordon Brown promised the City of London to stand firm on the withholding tax

Plans for a Europe-wide withholding tax of 20% on earnings from savings have been blocked by the UK Chancellor Gordon Brown.

He told a meeting in Brussels of the European Union's finance ministers (Ecofin) that the change was not in the UK's national interest.

But the veto created a mood at the meeting which BBC's European Business correspondent Jonathan Charles described as "very nasty".

The battle over the tax is now by far the worst row between the UK and its European partners since Tony Blair became Prime Minister in 1997.

Mr Brown insisted he had acted properly. He said: "I left our European partners in no doubt that there could be no agreement on the content of the savings Directive unless our concerns are met.

"This is not a British problem. It is a European problem - we will not agree to any directive that is against Britain's national interest."

'UK acting for political reasons'

The UK and Luxembourg had pledged to fight the tax plans, with the deadlocked outcome widely expected.

However, Luxembourg appears to have agreed to a compromise proposal, which was then blocked by the UK government.

City of London workers London bond dealers fear up to 10,000 jobs could be lost
The Brussels meeting was the last chance to resolve the issue before the European Union's summit in Helsinki - the deadline set by EU leaders to solve the issue.

The stage is set for further heated exchanges in the run up to that meeting, with the war of words already being stepped up.

EU tax commissioner Frits Bolkestein warned that UK failure to sign up for an EU-wide tax on savings interest would be "detrimental to the broad interests of the EU and the City of London in particular".

Finnish finance minister Sauli Niinisto, chairing the talks, said a majority of EU governments were convinced Britain had a "political problem" - and it had not acted because of concerns over City jobs.

French finance minister Christian Sautter summed up the situation as a traditional "14 to one" stand-off, with Britain once again isolated in Europe.

Mr Brown insisted late on Monday evening that it would not merely be London which lost out if the changes went ahead.

Germany's finance minister Hans Eichel worries about his tax revenues
"The danger here is that trade would move not from London to another part of Europe but would move from London right outside Europe," he told the BBC.

"That's something we are not prepared to support and that is why I have been so hard. It is in the interest of British growth and the interest of British jobs," he said.

The withholding tax is designed to stop tax avoidance. Tax authorities in Germany, France and Italy are particularly suffering, as thousands of savers have moved their money to accounts in London and Luxembourg, where they do not have to pay tax on interest earned.

Exemptions for bonds and investment funds?

They hope to stop the outflow of capital - and tax payers - by 'harmonising' taxes on savings across the EU.

The financial industries of the UK and Luxembourg, in turn, fear that the tax plans could scare away lucrative investments worth billions of euros, and cost thousands of jobs.

The UK government has suggested it might agree to a withholding tax, but only if the institutional bond market is exempt - which is worth $3 trillion, and largely based in London.

Luxembourg, in turn, wants a special deal for its investment fund industry.

The recriminations over the withholding tax could affect plans to reform the EU's financial services industry.

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See also:
07 Nov 99 |  The Economy
Deadlock on EU withholding tax
10 Feb 99 |  The Economy
Boost for EU tax harmony
02 Dec 98 |  The Economy
Taxing Europe

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