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Discord on harmonisation

It has been a while since I have written anything about Europe but some relatively recent developments have caused me to look again at this most intriguing of areas.

In the lead up to the general election, there will no doubt be much press coverage of the issue of the UK&#39s full entry into the European Monetary Union with the highly emotive adoption of a common currency, the euro.

This development, should it take place, will have a massive and direct impact on the financial services industry. However, it is not this aspect I wish to look at but that of taxation and, perhaps more sinister, tax harmonisation.

There can be little doubt that there are those in power within the European Union who see tax harmonisation as an essential complement to monetary union as a means of ensuring that trade and competition take place on a level playing field with no fiscal or monetary distortions.

This camp believes the full benefit of monetary union cannot be achieved without tax harmony. Despite this desire on the part of some, there are others who cannot countenance an effective giving up of fiscal sovereignty. The UK certainly falls into this other camp.

Recent developments seem to suggest that the “nos” have it. It has been reported that the European Commission will probably accept that all EU member governments are unlikely to agree to tax harmonisation.

Remember, there is still the requirement for unanimity on big tax issues such as these, as the EC has been unable to persuade EU governments to move towards majority voting on tax issues.

The UK&#39s favoured policy on this whole issue is an exchange of information between members rather than tax harmonisation. This reflects the Government&#39s victory last year when the EC agreed to an exchange of information between members rather than the imposition of a withholding tax on savings interest earned by EU nationals in another EU country.

The UK had been worried by the potential loss of the multi-billion-pound eurobond market from London but, on the other hand, Germany had been worried by its citizens crossing its borders to deposit large sums of cash with foreign banks in foreign countries, thereby escaping both taxation in Germany and a withholding tax abroad at, for example, 20 per cent.

Those considering the use of financial products sited outside their country of residence should consider very carefully that tax avoidance through non-disclosure is highly likely to amount to evasion. In addition – and in the light of this latest development – advisers should be aware that information exchange between the authorities is on the increase.

Examples of this include interest payable from one EU jurisdiction to the residents of another.

Continuing with the theme of the taxation of EU savings, it is worth noting that on November 26, 2000, the ministers of finance of the EU member states progressed further in the development of the proposed directive on the taxation of savings, which would apply where residents of one EU member state invest their savings in another EU member state. It is proposed that the directive takes effect from 2003.

The directive provides, broadly speaking, for all member states to adopt a disclosure procedure under which the paying agent – for example, a bank or other savings institution – would inform the tax authorities of the investor&#39s EU member state of the interest that investor is entitled to. The investor would then be assessed at the domestic rate of tax.

There appears to have been a split in the desires of EU member states in this respect. Some, such as the UK, are positively in favour of disclosure of information, with others, such as Belgium and Luxemburg (low tax zones with a high value attached to client privacy/secrecy) preferring withholding tax.

These latter states, including Austria, have seven years from 2003 to 2010 in which to continue operating withholding tax.

Investors with income subject to a withholding tax would, however, also be subject to tax in their home country. Of course, in the UK, a resident would have an obligation to declare such income to the authorities.

They may then have the ability to set any tax withheld at source as a credit against their final liability or whatever else is specified in any appropriate double tax treaty or provisions for unilateral relief where no treaty exists.

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