Compromise proposal tabled to break deadlock on withholding tax directive

A joint initiative by the Finnish EU Presidency and the European Commission to break the deadlock over the withholding tax directive is being "studied in detail", a British spokesman said yesterday.

The British insistence that the administrative burden imposed by the proposed directive is a threat to its massive City-based eurobond market had been set to precipitate a major confrontation at the EU's Helsinki summit which is due to start tomorrow. This evening finance ministers will meet in the city ahead of leaders to see if the new package meets British objections.

The directive would impose either an EU-wide minimum withholding tax on interest on savings in non-resident accounts, probably of 20 per cent, or a requirement to inform the depositor's home tax authorities about the details of accounts. It is seen in several capitals, most notably Berlin, as a key weapon in the struggle against tax evasion.

Yesterday's compromise proposes that, in respect of eurobonds only, the only information requirement would be the name and address of the bond holder, leaving it to the national authorities to secure more information.

The requirement is exactly the same as that on market operators arising from an existing directive on money-laundering which imposes a "know your customer" rule and means passport or other proof of identity is needed by investors. The Commission argues such a rule would involve no extra costs.

A spokesman for the Internal Market Commissioner, Mr Frits Bolkestein, said the offer reflected the extent to which Commission and presidency were prepared to "bend over backwards to accommodate Britain". The British willingness to study the proposals is seen as a step forward - until now they had insisted that all eurobonds should simply be exempted from the directive. Some 35 per cent of eurobond holdings will be affected because they are held by individuals.

Meanwhile, another row, again involving the British versus the rest, over the payment of royalties on the re-sale of artists' work is set to end up at the summit. In this case the British insist the levying of royalties will threaten their fine arts market and lead to an exodus to New York and Switzerland.

The issue was discussed by internal market ministers on Tuesday but not resolved because the British, about to be outvoted, threatened to declare the matter a "vital national interest", effectively postponing a decision for six months. The threat to invoke what is known as the Luxembourg Compromise outraged some ministers who said it was inappropriate in such a vote.