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Tuesday, 20 June, 2000, 13:03 GMT 14:03 UK
Q&A: EU savings tax dispute

EU proposals for a crack-down on savings tax evasion had been in deadlock for two years. BBC News Online explains the arguments.

What is the savings tax disputed in the EU?

It is known as a withholding tax.

The name derives from the fact that a percentage of the income earned by savers on investments outside their home country would be deducted at source, or "withheld".

A rate of 20% to 25% has been suggested.

So, for example, if an Austrian resident had a bank account or shares in the UK, the interest and dividends on those savings would be charged tax at 20% to 25% at source.

Why have some Europeans been so keen to introduce this tax?

Germany, for example, originally liked the idea because it has a particular problem with people dodging tax by taking their money out of the country.

A classic scam is for people to load their cash into a suitcase, drive it over the border into Luxembourg or Switzerland and put it in a bank there.

By law, they should still pay German tax on the interest they earn, but they don't declare it to the taxman.

And the banking secrecy laws in Luxembourg and Switzerland mean the German tax authorities can never find out how much is owed.

Why did the UK so fiercely oppose it?

Because the government was concerned that it would damage business in the City of London, without really addressing the Germans' problem.

The City has thrived partly because it is a bit of a tax haven for foreign investors.

Slapping an automatic 20% to 25% tax on whatever they make in the UK might well persuade some of them to take their money elsewhere, such as Switzerland or New York.

And the German tax evaders could still have gone to Switzerland just as much as before as it would not have been affected by a withholding tax because it is outside the EU.

So what were the compromise proposals?

The essence of the compromise position put forward by UK Chancellor Gordon Brown was to concentrate on ending banking secrecy laws and set up an open exchange of information on accounts held by non-residents.

This means that the correct tax can be levied by the home country on residents holding accounts abroad, without having to upset London's financial centre with a tax deduction at source.

But to work properly, there would have to be exchanges of information with countries outside the EU, otherwise the evasion could still continue.

What might have happened if the withholding tax had been imposed?

There is no possibility of the tax being introduced in the UK, but if it had it is debatable how serious the effects on the City of London might have been.

The most alarmist projections suggested that tens of thousands of jobs could have been lost, which seemed way out of line.

London is very attractive as a financial centre, partly because of the English language, partly because the enormous concentration of investment and staff that has already accumulated there.

That said, international finance is a footloose and fancy-free business. One of the key reasons why the City became so strong was that the US government imposed a withholding tax on investments during the 1960s.

US banks and brokers quickly spotted the opportunity to save money by moving funds offshore to London.

An EU withholding tax might have driven the markets towards Switzerland in the same way.

Has this been a triumph for Gordon Brown?

Very much so - initially the UK Chancellor was a lone voice against the imposition of the withholding tax, to the great irritation of the Germans.

But rather than simply saying "No, No, No", he won the argument, gradually convincing the other EU nations that the real issue was banking secrecy.

And against all the odds, countries like Luxembourg which thrive on the business generated by their banking secrecy laws, agreed in principle to exchanging information, subject to certain conditions.

Gordon Brown has got his way with the EU, but it is not yet clear whether he will manage to convince non-EU countries to join in ending banking secrecy.

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See also:

20 Jun 00 | Business
EU tax compromise agreed
29 Nov 99 | Business
Anger as UK blocks EU tax
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