Agreement on EU tax package no closer

An agreement by EU Finance Ministers here to allow member states to reduce VAT on a range of specified, small-scale, labour-intensive services to 5 per cent to stimulate jobs did little to allay fears that agreement on a major tax package will not be reached in time for this December's Helsinki Summit.

But although it was not touched on by the meeting, the Minister for Finance, Mr McCreevy, gave a strong hint of a softening of the Irish opposition to one of the elements of the package, an EU-wide minimum energy tax.

The tax is seen as a key ingredient in attempts to reduce greenhouse gas emissions, but Ireland, where increases in petrol and diesel duty have been very small in recent years, has opposed it arguing that greater peripherality, and hence distance from markets, would make it bear more heavily on Irish business. Spain is still resolutely opposed.

Mr McCreevy said that while he still had "grave doubts" he had indicated that he wanted to be helpful in reaching a compromise, warning that the idea of such a tax had acquired a strong momentum in Europe. Discussion of a key element of the tax package, the common treatment of savings in non-resident accounts, was actually set back by a British paper delivered on the eve of the informal meeting here which made clear that London is determined to exclude the Eurobond markets from the proposed directive's provisions. The directive, aimed at reducing the level of tax evasion through non-resident accounts, particularly in Luxembourg, would require member states to charge a minimum withholding tax of 20 per cent or to notify details of the account to its holder's tax authorities.

Luxembourg has accepted the principle but also wants certain exclusions and has now been asked to produce a paper for the November meeting of Ecofin on the exemption of what are known as "collective investment funds", large components of many of which involve fixed interest bonds. Although reluctant to identify closely with the Luxembourg case, Irish officials will be awaiting the report with considerable interest as many such funds are traded in the IFSC.

Mr McCreevy, rehearsing a familiar line of argument, said the challenge was to strike a balance between the need to raise tax while not driving the bond market out of Europe. London had special problems which all acknowledged. But Mr McCreevy also conceded that there are real problems of equity involved in the sort of technical solutions being suggested at present when they involve the exclusion from tax of bond holdings over a certain value. The British paper points to the reality that the international bond market is the largest fixed income capital market in the world with over €4,000 billion euros in bonds outstanding. Half of these are EU-based borrowers and the City of London handles some 60 to 80 per cent of primary issuances and 75 per cent of trading.

With the tax measure targeted at individual savers, the British point out that 90 per cent of the international bond market is institutional and that the taxation of their profits was not problematic. A withholding tax would be cumbersome and costly and lead to a flight of capital, they argue.

For some member states there is also reluctance for the EU to go ahead unilaterally with such measures while negotiations with third countries like Switzerland and Lichtenstein have barely started. The Commissioner for the Internal Market, Mr Mario Monti, would only say that the British paper was broadly encouraging because it had not raised any issues of which the Commission was unaware. The Finnish Finance Minister and President of the Council, Mr Sauli Niinisto, said the paper "clarified" the debate. The other major component of the tax package, co-ordination of the fight against "harmful" tax competition, is also understood to be in difficulty with a high-level group currently considering some 250 separate tax regimes to see if they are actually distorting competition. Officials are due to travel to Italy in the next couple of weeks for what is expected to be a long series of meetings aimed at reaching a common definition of "harmful".

Mr McCreevy described the process as a huge problem and accepted that the likelihood was that the deadline set by heads of government for resolving the three issues by Helsinki would not be met.

The informal meeting was dominated by a discussion of the separate VAT issue which is crucial to the French ahead of the their Budget on Wednesday. A central feature of the latter will be a reduction in VAT rates for repair work on homes. Opposition came from Portugal which unsuccessfully sought to have restaurants included in the list of services to which governments could apply the cuts.

The listed services include repair work on bicycles, shoes, leather goods and clothing, renovation of homes (not including materials), window cleaning, hairdressing and domestic services.

Mr McCreevy gave no indication of a willingness to reduce Irish VAT rates.