Germany to push for greater harmonisation of taxes within the EU

Germany, which takes over the European Union's rotating presidency next week, yesterday indicated that it would back proposals for greater tax harmonisation in the 15-nation bloc despite resistance from other EU nations.

The Finance Minister, Mr Oskar Lafontaine, and Mr Wolfgang Clement, the prime minister of North Rhine-Westphalia, said in separate newspaper interviews that it was vital for the EU to narrow wide gaps in tax levels to prevent economic distortions.

Mr Lafontaine warned that the EU risked losing financial support from Bonn if no breakthrough on tax harmonisation was reached, while Mr Clement said Europe urgently needed unified value-added tax (VAT) and energy taxes.

Mr Clement told Bild am Sonntag that tax harmonisation in the EU "is urgently needed, especially with the indirect taxes. We need a single value-added tax and a single energy tax level".

The VAT level in the EU varies from 15 per cent in Luxembourg to 25 per cent in Denmark and Sweden.

Germany, which wants to make tax harmony a focus of its sixmonth presidency, has some of the highest corporate and income tax rates in the EU. It complains that countries with lower rates hold an unfair advantage in the single market.

However, the calls from Germany for tax harmonisation have riled Britain, Ireland and other nations, which fear an erosion of national sovereignty.

Mr Lafontaine said he believed it would be possible to make progress towards harmonising policies during the German presidency, starting on January 1st.

"One thing is clear," Mr Lafontaine told Welt am Sonntag. "There is no way that Europe can expect Germany to pay the highest net contribution, but at the same time it does nothing against the unfair tax competition. That is incompatible with the thought of solidarity."

The German Chancellor, Mr Gerhard Schroeder, has complained that Bonn's contribution of 60 per cent of the EU's budget, or 22 billion marks ($13 billion), is unfairly high.

Mr Schroeder and Mr Lafontaine have made it clear that they are not going to settle for the status quo. They have studied the techniques of the former British Prime Minister, Margaret Thatcher, whose 1984 battlecry of "I want my money back" helped Britain win a £2 billion rebate.

Mr Lafontaine's remarks were the first public suggestion that Germany may link its financial support for the EU with the stalled efforts to co-ordinate taxes. They were also a further hint that the German presidency may be marked by hardball tactics.

"Schroeder has introduced a new approach to the EU - away from back-room deal-making and negotiations, away from Germany's role as paymaster," wrote Bild am Sonntag in a commentary. "It will be nice if the government achieves some of its aims."

Mr Lafontaine became a bogeyman for much of the British press earlier this month, as a result of his efforts to promote EU tax harmonisation and his call, backed by France, for EU governments to one day give up their power to veto tax changes.

The Bundesbank deputy president, Mr Juergen Stark, has supported the calls for harmonisation of indirect taxes as well as of taxes on interest income.

Mr Lafontaine said the EU Commission had made two concrete proposals towards tax harmonisation.

"There are two recommendations from the EU Commission: first, dismantling tax oases; and second, taxing interest income at the same level," he said.

Germany wants an EU-wide withholding tax on savings, an idea opposed by countries such as Britain and Luxembourg. German savers, attempting to evade such taxes in their own country, have poured billions of marks into foreign bank accounts in recent years.