Savings tax teeters

By Anna McLauchlin - 9th February 2004

---

A hardwon agreement last year on how to tax savings could fall at the last hurdle, if the European Commission does not manage to persuade certain third countries to agree similar measures by June.

Internal market commissioner Frits Bolkestein will deliver an update on negotiations with Andorra, Liechtenstein, Monaco and San Marino over the 'tax package' to EU finance ministers on Tuesday.

The implementation of the tax package due in January 2005 is dependent on a deal being drafted with the four small countries by June this year, which would run along the same lines as a savings tax agreement clinched with Switzerland last June.

Under this agreement Swiss banks would apply a 'withholding' tax to non-Swiss savings or relay certain information on willing account holders to tax authorities to stop expatriates dodging taxes.

Negotiations with the other four countries are tricky given the secrecy laws in these known tax havens.

And an added thorn in commission's side is the fact that Switzerland is refusing to sign the agreement drafted last June unless the commission gives way on Swiss demands on closer security cooperation and tax fraud.

An EU official insisted on Monday the commission is "confident everything will be resolved in time for a decision to be taken by ministers in June (2004)".

But failure to strike a deal with Switzerland and the other countries would be a serious blow for the commission which had to fight hard to get the tax package approved in council last year.

Also on the agenda for finance ministers are the nominations for replacing Eugenio Domingo Solans on the European Central Bank Board of Governors.

So far only Ireland has officially presented a candidate; Michael Tutty who is currently vice-president of the European Investment Bank.

But sources say Belgium will also nominate one of two candidates presently on the board of the Belgian national bank; Peter Praet and Luc Coene.

If more than one nomination is put forward, an official said on Monday the decision is likely to be delayed until the next finance council in March.

Ministers will also approve updated economic programmes from Greece, Ireland, Italy, Luxembourg, the Netherlands, the UK and France.

Despite the commission's reservation that Paris has not planned sufficient spending cuts to honour its commitment to bring its deficit under the EU three per cent of GDP limit by 2005, an official on Monday insisted there would be no obstacles to the adoption of France's programme.

On the internal market side, finance chiefs will debate plans for reduced VAT rates but sources say there is little hope of making progress.

France has asked to be allowed to apply a reduced rate of VAT to its huge restaurant industry because Jacques Chirac pledged the cut as part of his election manifesto.

But the move is opposed by Germany and Denmark and talks have stalled since the proposal was adopted in summer 2003.

The proposal requires unanimity to become law and even if Paris convinces Germany to play ball the UK, Luxembourg and Ireland have said they will veto a deal which removes their right to apply a zero VAT rate on kidswear.

To bridge the gap, ministers are expected to adopt without debate an extension of a tax experiment for a further two years which allows certain member states to continue to apply a reduced VAT rate on labour intensive services such as home help and building repairs.